What’s Your Edge? (Facebook Edition)

You don’t have to believe that markets are completely efficient, and it’s not really what I want to argue about in this post.   When people ask me if I think that markets are “efficient,” I say that they are “efficient enough.”

Whenever you’re in a trade, you should be asking yourself one specific question:

What is my edge?

I’m thinking of this concept today as Facebook ($FB: no positions) has a monstrous lockup expiration.   Today, almost 800MM shares of FB stock will be “free to trade” – available for sale by early employees and insiders.   Guess what – this lockup expiration has been extremely well published.   It’s been discussed by everyone everywhere, and one might EXPECT that it would be priced in to a large degree.

So when the stock gaps up this morning:


it’s not “manipulation,” it’s kinda rational:  normal.    As I explained in 140 characters or less:

Back to your edge:  did you really think that your edge in shorting Facebook was that you knew that a metric crap-load of shares would be available for sale today as a result of the lockup expiry?

Newsflash:  EVERYONE knew about the lockup expiration, and today’s price action shows that lots of people clearly had that “Short $FB on the expiring lockup” trade on already.   When everyone expects one thing to happen, the market usually finds a way to do the opposite…

EDIT:  I should clarify one thing: for what I’m saying to be true, “The Market” has to be able to price in the expected event:  in this case, that means that there has to have been “borrow” available so that people who wanted to short Facebook could easily do so.   The stock was indeed easily available to borrow in the past days and weeks.


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