cryptogon.com news – analysis – conspiracies

May 19th, 2012

Warning: This is not a recommendation to buy, sell or hold any financial instrument.

Some emails have been coming in about the Facebook IPO.

I don’t ever trade IPOs. As a 100% technical trader, there’s nothing to go on with an IPO. The values associated with the IPO are arbitrary and there is often VERY strong voodoo at work. These things are usually designed as scams to make the owners and underwriters wealthy, while treating investors as marks (although, this could be said about much of what happens in the market). Often, large blocks of shares will unlock and dilute the thing down the road. On and on.

So, no, I don’t go near IPOs.

With Facebook, though, I did watch a realtime price ticker once they finally opened it. Wow. What a show.

It came out of the gate at around $42 and people just sold the living shit out of it. These were the whale clients at firms who had access to blocks of shares before it was trading, dumping into the crowd.

We knew the issue price was $38, so I watched very carefully as it got down there for the first time. As the price dropped to exactly $38, it held there, absorbing, I don’t know, millions or tens of millions of shares.

“Squid on the bid,” I actually laughed out loud.

Day traders quickly figured out that someone with infinite ammo was defending $38, so the little guys decided to party like it was 1999, taking it long for a couple of bucks, shorting it back down, where the axe would open fire again and not stop until the herd learned that there was only one way to go from $38 on the first day, and it wasn’t down.

If you have tick data for FB from Friday, it would be worth replaying that on your time/sales screen to watch what happened around that $38 level. Get yourself a big bucket o’ popcorn ready because the “unseen hand of the market” put on a good one for those who knew what they were looking at. [Update: Scroll down for video.]

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Update: It Was Morgan Stanley

I assumed that it was Goldman Sachs (Squid on the bid) holding that $38 level. It turned out to be Morgan Stanley.

Via: Wall Street Journal:

Facebook Inc. took eight years to stage one of the most anticipated initial public offerings ever. The anticlimax came Friday, as Wall Street bankers struggled to prevent the newly minted stock from ending its first day with a loss.

The stock had been widely predicted to soar on its first day. Instead, up until the closing moments of the trading session, Facebook’s underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.

In the end, the bankers succeeded. When trading on Nasdaq ended at 4 p.m., the social network’s stock was up just a hair, 0.6%, at $38.23.

…

Facebook was also hurt by investors’ high expectations of a healthy first-day pop in the price, according to people familiar with the matter. When that pop didn’t happen, it prompted a selloff, these people said.

That’s when Facebook’s underwriters had to step in to support the company’s share price, people familiar with the matter said. In particular, lead underwriter Morgan Stanley MS was assigned to be the deal’s “stabilization agent”—meaning it was the firm’s job to keep the shares above the offering price, these people said. In that role, Morgan Stanley was forced to buy Facebook shares as the price slid toward $38 in order to prevent the price from crossing into negative territory, according to these people.

Morgan Stanley, which led the platoon of 11 Wall Street banks that arranged the listing, had to dip into an emergency reserve of around 63 million Facebook shares—worth more than $2.3 billion at the offer price—to boost the price and create a floor around $38 a share, according to people close to the situation. In successful IPOs, the reserve, known as the “overallotment” or “green shoe,” is used by underwriters to meet soaring demand but in this case, it was used to prop up Facebook’s ailing share price.

The process is common in IPOs and works like this: The underwriters have the extra shares available to either sell or buy for a period after the IPO. If demand is strong, they sell them like all the other shares. But if the stock price falls, they can buy them back, effectively creating a floor for the price.

Facebook’s price began falling almost immediately after shares began trading. It is unclear exactly when Morgan Stanley stepped in, but traders said that the price movements throughout the day, with the shares occasionally touching the IPO price but never crossing below it, suggested the firm was active throughout much of the session.

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Update: HFT Tractor Beam in Facebook

Thanks to BW for sending this in.

Via: Premarket Info YouTube Channel:

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