You have probably heard from your bankers that the Nasdaq exchange is for tech savvy companies like Google and Apple and the NYSE is where the blue chip companies like GE and Caterpillar choose to list.

You may think that the Nasdaq market is more of an electronic exchange where dealers place competing bids and offers to help facilitate institutional client trades.

You may look at financial television and see scenes from the NYSE and think that the NYSE market is more of a floor-based auction model where your stock would trade at a “post” on the exchange.

You may be thinking that regardless of which exchange you pick, your stock will help investors create wealth for themselves by investing in your company for the long-term.

We hate to break the bad news to you but the fact is, in today’s market, it doesn’t matter where you list. Your stock is about to become one of the biggest casino chips on Wall Street.

Ever hear the terms “rebate arbitrage” or “latency arbitrage”? Ever hear of “colocation”? Do you know what “an exchange private data feed” is? How about an “actionable IOI” or a “dark pool”?

We bet you have probably never heard of these terms (maybe you have been too busy coding lately).

These terms are really what stock trading is all about nowadays. Your stock will now be traded by high frequency traders who have an average holding period of 22 seconds.

The majority of them won’t care about your earnings, or your new “likey like” button that you just launched. They won’t care about how many gazillion users you just signed up or how many eyeballs are on your site.

They will only care about flipping your stock for a very small profit – millions of times per day. They will only care about getting paid a rebate 1/3 penny per share to “add liquidity” in your stock.

They are not looking to invest in Facebook, they are looking at it as a tool to help them make money in their high speed arbitrage world.

Before you make your decision on where to list, also keep in mind that one-third of your stock will be traded in dark pools that are off-exchange and away from the public’s eye.

Know that even though the spread in your stock will be one penny (most of the time), your stock will not necessarily be liquid. Sure your stock will trade a lot of volume, but this is not the same as liquidity.

Know that when your stock starts to move around intraday by 3-5 per cent, there will be no one to call to ask what is going on.

You may be thinking now, how did this happen? How did the stock market get so screwed up? What ever happened to the goals of capital raising and investor protection?

Well, it’s a long story. One that is much too long for this letter. Maybe if you have some time, give us a call and we’ll explain what happened.

Best of luck on the IPO. If you pick the NYSE, know that the podium looks much bigger on television.

Investors are constantly told to read prospectuses and annual reports. Yet many do not. This is a shame because doing so can reveal important information.

Consider the following details from a registration statement that was recently filed with the U.S. Securities and Exchange Commission (SEC):

• The company has a very limited operating history and profits have only been realized during the past three years.
• The primary source of revenues is advertising, but customers are changing to a platform (mobile devices) that the company does not generate any meaningful revenue from.
• Subscriber growth will slow because of the company’s high penetration rates in its current markets.
• The CEO controls the majority of all voting power, including final say over who gets elected to the board of directors. Furthermore, because the company is a “controlled company,” the board of directors does not have to be independent.
• The CEO says his company “was not originally created to be a company” and that he has “always cared primarily about [the company’s] social mission.”
• Last year, the company spent nearly $700,000 on a corporate jet used in part to fly the CEO’s friends and family.
• The company anticipates that a substantial number of shares could be sold up to 18 months following the completion of its initial public offering.

If this was all you knew about the company, would you buy shares in it?

If the company’s name is Facebook (FB), many investors will likely answer “yes.” Depending on the size of the initial public offering (IPO), it is possible that demand will outstrip supply for the IPO shares. Enthusiasm about owning stock in the current “next big thing” will cause some to pass over Facebook’s weaknesses.

Speculative investments always come with risks, but sky-high valuations magnify those risks. Media reports estimate the social networking company could be valued between $75 billion and $100 billion at the time of its IPO. If this estimate holds true (details about the price and the number of shares being offered have not been set), Facebook would rank among the 70 largest publicly traded companies. Furthermore, FB shares would command a price-earnings ratio of 150 and price-to-sales ratio of 27. (The price-earning ratio is based on 2011 net income of $668 million attributable to Class A and Class B shareholders.)

As you can see, there are several negatives about Facebook as an investment. Not mentioned yet are concerns about privacy, Facebook’s inability to penetrate China so far and CEO Mark Zuckerberg’s lack of experience. The last point is particularly worth considering because running a privately held start-up is very different from managing a closely-watched public company that has to report results on a quarterly basis.

Most of the information above came from Facebook’s S-1 filing. This is a registration statement filed with the SEC before a company goes public. You can find significant information about Facebook, or any other soon-to-be public company, by skimming through the S-1 and looking for potential red flags. Be sure to also look at the footnotes, where you will find such things as the jet used by Zuckerberg’s friends and family.

For companies that are already publicly traded, look at Form 10-K. This is an annual report filed with the SEC. Now that year-end numbers are being reported, companies will soon file updated 10-Ks. It is well worth your time to look at these filings, because they may give you reason to think twice about a stock that looks appealing at first glance.