Comments on: Morgan Stanley’s $2.4 billion Facebook short http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: TFF http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39408 Wed, 23 May 2012 17:46:06 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39408 “I think they’re rarely “stable”, just because it’s new, and will be that way, with or without the manipulation.”

Absolutely. Doesn’t mean that the manipulation can’t take the edge off it. Even if it was an utter failure in this case.

“there are probably better ways to figure out a reasonable price than asking totally conflicted brokers driven by self-interest.”

Sure, you are welcome to consider those alternatives for your next IPO. I would be interested in seeing something like that happen. Surely the SEC can’t mandate the present process?

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39397 Wed, 23 May 2012 15:44:12 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39397 “I never said that it WOULD prevent instability, merely that it was a stabilizing force. IPOs are inherently unstable in their early days of trading. Some mechanism to get the supply right (or closer to being right) is helpful. Doesn’t mean it will always be successful.”

I think they’re rarely “stable”, just because it’s new, and will be that way, with or without the manipulation.

“They only assumed risk if they bought back MORE shares than they had covered by the green shoe. ”

But that’s not part of the IPO process, that’s their own proprietary trading. If that action is expected by newly listed company, then I guess they should be paying big fees.

On your second comment, obsolete means there is something better available. The iphone 4 is not obsolete because the 4s is out, as the 4 is less expensive. It’s not the same solution, and meets the needs of some customers. The current IPO process meets the needs only of the underwriters. Who aren’t really necessary. A company advising on the initial price wouldn’t get paid anywhere near what the current cost of the IPO is, and there are probably better ways to figure out a reasonable price than asking totally conflicted brokers driven by self-interest.

I’m with you on owning shares controlled by insiders. But I’m not against shorting because of what it does to me, but rather what it does to the stock. I know people in the financial industry and many investors like it, as it is a useful tool (or weapon), but from an engineering perspective, it is a dangerous element to design into a complex system. While positive feedback is generally a bad thing for systems that you would like some amount of control over, not all negative feedback is good (especially when the negative feedback loop has its own positive feedback loop on it, which is how I would characterize short selling).

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By: TFF http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39387 Wed, 23 May 2012 13:26:25 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39387 “I did suggest that the IPO process is obsolete”

Quite possibly true — but “obsolete” is not necessarily bad, just sub-optimal.

Even in your model, IPO advisors would be needed to help establish the price. So I suspect the “easy profits” would still be there.

Finally, when I buy shares in a company, I am buying a fraction of their current and future profits. To a first approximation, it doesn’t matter to me who owns the other shares, or whether the fractions sold add up to 100% or not. As long as there is a solvent party guaranteeing my share of the profits, I’m happy. Synthetic shares are fine.

Beyond that first approximation, I am uncomfortable owning shares in a company that is held/controlled by insiders (who may not have my interests at heart), especially when the insiders are busily selling shares into the open market and thus increasing the float. Stocks in that situation tend to trade poorly.

Stocks with a large short position are in the opposite situation. If the shorts accidentally pile in on a solid company, fairly priced, then they get run off the road in short order. The rapid withdrawal of shares from the float caused by a short squeeze can generate large short-term gains.

Heads I win, tails they lose. If the company I buy is solid, then I get either get an exceptional earnings yield on a low price or I get rapid capital gains on the short squeeze. Either way, short activity doesn’t bother me.

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By: TFF http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39382 Wed, 23 May 2012 11:09:14 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39382 “I never meant to imply that any part of the IPO process caused the instability, only that it didn’t prevent it.”

I never said that it WOULD prevent instability, merely that it was a stabilizing force. IPOs are inherently unstable in their early days of trading. Some mechanism to get the supply right (or closer to being right) is helpful. Doesn’t mean it will always be successful.

“It’s entirely possible that they bought all of the shares they sold short at $38, breaking even. So they really didn’t assume any risk, did they?”

They only assumed risk if they bought back MORE shares than they had covered by the green shoe. But then, they only profited from the “short” if they failed to defend the IPO price. I see no indication that they either assumed risk or profited from this arrangement.

“When people think a stock will go up, they buy it, which drives the price up. When they think it will go down, they sell it, driving the price down.”

The limitation here is that you are dealing with a fixed supply. If you have 1 thousand shares available, and 1,100 people are convinced that it is a great deal at any price, the price shoots to the moon. Allow short selling and the other million people are able to chime in on the opposite side of the equation, creating enough new shares to satisfy the 1,100 zealots and a few more to bring the price back down to a reasonable level.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39371 Wed, 23 May 2012 03:51:52 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39371 nvidetas, no, there weren’t more shares sold than FB wanted, they allowed an over-allotment of 15%. However, the underwriters only bought 422M, not the 484M that were sold on opening day. I didn’t say that would drive the price up, only that the underwriters were protected against the loss that would occur by having too many shares out there.

I didn’t say the system was de-stabilized for any reason, only that the system didn’t prevent instability, which is the alleged justification for allowing underwriters to sell more shares then they buy from the company going public.

I did suggest that the IPO process is obsolete, that there is no reason why, with computers and the internet, an IPO couldn’t be scheduled – just like any other round of investment. A company going public could set a price and a date, and anybody wanting to buy shares at that price could commit to the price being demanded. The shares would be allocated on a first-come, first serve basis, and once the allotment was fully subscribed, the shares could be distributed and trading could begin. But that would eliminate easyt profits, wouldn’t it?

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39369 Wed, 23 May 2012 03:45:31 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39369 TFF, I never meant to imply that any part of the IPO process caused the instability, only that it didn’t prevent it. And when a stock climbs 50% after its IPO, that is also just as unstable, but only the company is short-changed (although it makes millions of people think they need to be in on the next big IPO).

You know the price did not fall below $38 on Friday because MS was buying shares at that price. Once they stopped buying shares, the price dropped. It’s entirely possible that they bought all of the shares they sold short at $38, breaking even. So they really didn’t assume any risk, did they?

Paying too much isn’t necessarily de-stabilizing, unless a lot of people do that. It’s not the long positions that cause instability, it’s the positive feedback that is inherent in market-based systems that causes instability when unchecked. When people think a stock will go up, they buy it, which drives the price up. When they think it will go down, they sell it, driving the price down. It works in both directions, so it’s not necessarily being long. And besides, you can’t own a stock without being long in it.

My problem with the short sale is that misrepresents the number of shares for sale. If done in enough volume, it is self-fulfilling. What if I have a stock that is shorted, and the shorts drive the price down, and I get a margin call? I’m not going to thank you. I’m not saying we need to prohibit short sales to protect leveraged speculators (I’d rather they don’t exist), I’m just providing an example of how not every shareholder benefits from the shorts. If the stock is over-priced, then it shouldn’t require short sales to bring it to reality. Let those who own it decide to sell it and right-price the stock.

Yes, you know very well that I don’t believe in purely unregulated markets, I was only being facetious. It seems like those who cry the loudest for less regulations are the ones who benefit from the regulations that allow these legal market manipulations.

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By: niveditas http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39368 Wed, 23 May 2012 03:03:35 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39368 KenG_CA, you’ve got the supply/demand completely backwards. The existence of the greenshoe means that 15% MORE shares were sold to investors in the IPO than Facebook originally wanted to sell. That doesn’t drive the price up, that drives the price DOWN.

If the system is as you think destabilized because IPO investors think the price is going to pop on the first day, then making more shares available if it does, IS stabilizing. If it doesn’t work to stop the pop, maybe you need a 30% greenshoe instead of a 15%, a 0% greenshoe is going completely in the wrong direction.

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By: TFF http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39367 Wed, 23 May 2012 02:38:16 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39367 KenG, you are too smart to confuse association with causation. Yes, the Facebook IPO was overpriced and has proven unstable. But unless those over-allotment shares are still trading on the market, you are chasing the wrong cause.

Moreover, the price did not fall below $38 until Monday. If you foolishly participated in the IPO at the inflated price, you had every opportunity to GET OUT on Friday. This opportunity would not have existed without the green shoe option.

Buying overpriced properties isn’t destabilizing? Truly? You have a decade of recent experience with bubbles, and you still believe that? Shorting stocks didn’t cause the Dot.com bubble. Shorting real estate didn’t cause the housing bubble. LONG positions are implicated in every major instability we’ve seen in the markets.

If I sell 10M shares of a stock that I don’t own, that will drive down the price. If they began at a fair price, then you should thank me and buy more at a discount. Eventually I will need to cover my short — and you will make a handsome profit. So where is your problem with that? Short-selling is only profitable when the shares are ALREADY overpriced, pushed into instability by the “long-horn” herd.

I agree, a short is an artificial creation, not necessary for the functioning of the market. However a market that includes short positions ought to be fundamentally more stable than a market that does not. Even for a strictly long investor like myself, that is a positive attribute.

Please don’t try to sell me on the purity of free and unregulated markets. You don’t believe in them any more than I do.

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By: niveditas http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39366 Wed, 23 May 2012 02:34:21 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39366 KenG_CA, your comment was “why is MS getting paid for underwriting this when they’re not taking any risk?” If they’re not taking any risk, the poor taxpayers aren’t backing any of that non-existent risk either. So why don’t you step up to the plate and underwrite the next FB for the bargain fee of $10mm? I’m sure you’ll be able to drum up lots of business.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stanleys-2-4-billion-facebook-short/comment-page-1/#comment-39352 Tue, 22 May 2012 20:18:04 +0000 http://blogs.reuters.com/felix-salmon/?p=14247#comment-39352 TFF, you’re comparing apples and oranges when you talk about short and long positions. Markets are created for buying and selling of things. A short is not a thing, it’s an artificial creation, and isn’t necessary for the functioning of the market.

Buying NFLX at $300 is not necessarily de-stabilizing, because other people don’t have to follow suit. But if you sell 10M shares of a stock that I own and you don’t, you are impacting the price of the stock without even owning it. If you want to bet that the stock will go down, I don’t have a problem with that, go buy a put, it doesn’t temporarily inflate the number of shares in existence (or is that how they are constructed, via short sales?).

So Felix has educated me once again, on how underwriters are legally allowed to manipulate the stock, and these comments have also enlightened me, as I can see how many people think selective manipulation is o.k. I get it; we want free markets, but some markets can be less free than others, as long as the right people benefit from the loopholes. (Facebook was down another 9% today, so you’ll have to work harder to convince me of the stability thing).

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