Square jumps in market debut
reuters.com
reuters.com
This usually means retail flow( regular folks) using E-Trade, Ameritrade, Interactive Broker, Scott Trade, etc to buy/sell shares. These firms get paid to send their orders to HFT firms who fill the orders internally(ie not on an exchange) and then use trade reporting facilities to notify the markets of these orders.
Also supporting this thesis is the number of small and odd lot trades.
So you could argue that main street likes Square more than Wall street.
With the market down and Match.com's IPO popping less, this is a very good opening for them.
Having said that, the real test for most new stocks is 6 months out when they've had 2 reporting quarters, options start to trade and short interest numbers( a measure of how many people want to short the company) start to have some validity.
Question to anyone more informed than me......
Do squares late series investor's liquidation preference kick in at the IPO opening price or the vwap price through the day?
If it's the former, then the late stage investors are going to get a great double dip of getting a huge increase in shares due to the ipo price being below their strike and get the benefit of this pop.
Maybe late stage investors aren't as dumb as people around here have been claiming lately?
Where are you getting your data - a Bloomberg terminal?
Very small float. Seems like they structured the IPO to have minimal exit risk and to be a PR success rather than going for a higher starting price and capitalization. The "Don't worry we know there's a bubble but we're being realistic and the stock is a good buy" strategy.
That's the norm in all stocks these days because of HFT. Even in highly liquid names.
And nobody's been claiming that late-stage investors are dumb; in fact quite the opposite. Late stage investors tend to be very large, professionally managed equity funds - they are as savvy as investors get, and they're strong-arming early stage investors into unfavorable liquidation preferences. They're also the type of investor to have media / analyst contacts they can use to push down the IPO price knowing that it's going to pop. The discussion with late stage investors is really "the fact that late-stage investors are sucking up a disproportionate share of the profits from unicorn exits is endangering the VC investment model".
The answer is that you cannot do this because it is NOT TYPICAL. Plenty of tech IPOs flop but cognitive bias means you only remember the googles and apples and squares and not the 50% that go south of ipo price straight after launch.
The SEC filings from every company before their IPO contains more than enough data to evaluate their standings as a business, and are publicly viewable. There's a reason people know things, it's not all magic.
So then you'd have to get a retail or institutional investor who JUST PURCHASED shares to lend them to you to short.
In which case, why would they bother buying them in the first place.
If the short to long ratio gets too close, they will close out shorts or try to borrow from other clearing firms so that they don't end up naked. Early on, most firms will just close the short.
I don't think what you said is 100% true either. Charles Schwab brokerage definitely asks before lending out, advertises the interest the borrower is willing to pay on the loaned shares, enrolls the willing lender into Schwab Securities Lending Fully Paid Program, and then buys an insurance policy from Lloyd to cover counter-party default. All of this is done via FedEx letters and hand-written signatures.
Sounds like some brokerages don't ask and keep the fees and accrued interest to themselves, which is shady. ETFs and mutual funds don't have to ask anybody, of course, and usually pass on revenue from securities lending to their customers via lower fees.
Cash accounts are different creatures.
Also, unless a stock has crazy liquidity, instruments like shorts and options are generally not available to individuals for a while after an IPO. A hedge fund may be willing to issue them, but they're set up for low volume/high value trading so they only deal with other large institutional funds. Your average bank that would back options or shorts for an individual isn't willing to take on that kind of risk for a recently-IPOed stock.
> Also, unless a stock has crazy liquidity, instruments like shorts and options are generally not available to individuals for a while after an IPO. A hedge fund may be willing to issue them, but they're set up for low volume/high value trading so they only deal with other large institutional funds.
How can a hedge fund issue options until options are legally able to trade? Short answer, they can't.
> Your average bank that would back options or shorts for an individual isn't willing to take on that kind of risk for a recently-IPOed stock.
Banks dont' "back" options, what ever that is supposed to mean. They are created when someone writes one, This is almost predominately, market makers and buy side funds, though the sell side will write some options.
And the bank takes on almost zero risk when they lend securities to short sellers. The sellers post collateral at the end of each day that is usually around 100% of the current short. What risk do you think banks are taking on when lending?
> I would expect to see Square drop precipitously over the next week/month as the professional investors can make money by pushing the valuation down, then it'll stabilize somewhere near the IPO price in 6-12 months.
Based on what? probably not history as I just went through all the IPO's over the past 3 years, guess how many are trading within 5% of their IPO price? About 5% of them
> Company fundamentals have very little to do with share price in the first year or two of an IPO; it's almost entirely psychological.
Again, based on what? I don't think you get to state this without some basic research. Why after 2 years do people start looking at fundamentals?
Couldn't a hedge fund call up their bank of choice and ask them to write a custom OTC option? Assuming of course the bank wants to take the other side of the trade. Or does the law prohibit any sort of derivatives created by anyone?
How could parent have done this? Can non-super-rich individuals typically participate in IPOs? If not, then the only option is to buy at the market price at open, i.e. after any said 'pop'.
(I'm not commenting on whether access to IPOs is a sure-fire way to make money.)
"Over the last 50 years, I.P.O.’s in the United States have been underpriced by 16.8 percent on average. This translates to more than $125 billion that companies have left on the table in the last 20 years."
Normal over the last 50 years, maybe.
http://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-under...
The street hated Google's Dutch auction, and refused to push it to retail investors; a very unusual move at the time. The IPO estimates were at one point over $100, but if I recall correctly, the auction dropped down into the $80s, at which point at least one of the VCs pulled out of the IPO completely, preferring to hold their shares.
Anyway, despite these incredibly bullish indicators, my advisor didn't like the IPO.
It was very complicated to participate in too; you couldn't go through your normal channels. I think the complexity would be easily manageable by a modern UI/UX pro; the underlying market mechanics aren't that difficult. But hitting '90s era UI/UX with unwilling brokers was a tall order.
Even if it's uncommon, an auction would ensure it doesn't happen to you. Maybe!
(These are all honest questions, just to be sure. I have no preconceived idea what the answers might be! I'm not clued up enough to argue with rhetorical questions on this stuff.)
They just needed to get the deal done (http://avc.com/2015/11/getting-the-deal-done/_.
A pop makes for a good headline. But really it is a terrible deal.
The half about investment bankers and their friends being happy is guaranteed to be accurate because they bought low and now get to sell high.
As for the other half, it is theoretically the job of Wall St to figure out what main street will like. However Wall St makes money by being bad at that job. Is there any wonder that they are consistently terrible at it?
a) they screwed up (60% is too high);
b) they have to balance making as much money as possible (=> high price), and not ripping off the investors they hope will participate in future IPOs (=> low price); and
c) current shareholders want a healthy secondary market and a good collection of longer-term shareholders, even if that means getting paid somewhat less for the ~5% of the company they just sold off.
Secondly you have to look at the agency problem. The investment bank earns 7% fees, but the investment banker does not. However the people the investment banker sells the IPO to makes the full pop. And that list these days often includes a nice chunk for "friends and family". Nobody admits to kickbacks, but it is not hard to structure a deal where it is not in the investment banker's personal interest to act in the interest of the company going public.
Truth be told, I haven't paid much attention to this for a while. But look at http://www.econ.yale.edu/~shiller/behfin/2002-04-11/loughran... for an analysis of this issue during the dot com era. Their conclusion was that investment bankers were clearly NOT operating in the best interests of the companies going public.
I think you may be misunderstanding the "green shoe option": http://www.investopedia.com/articles/optioninvestor/08/green.... The underwriting bank sells short some shares to investors at the IPO price before it starts publicly trading, and has the option to buy back those shares from the issuing company at (a small discount to) the IPO price. If the price goes up after opening, then they buy and sell those shares at (nearly) the same price, so they only make money by making 7% of a larger number. If the price goes down after opening, they can buy shares on the open market at a price less than the IPO price, and keep 100% of those profits. For example, the banks underwriting the Facebook IPO made $100m because of the price drop (http://blogs.wsj.com/deals/2012/05/23/morgan-stanley-other-u...).
I also think that this particular agency problem is not as bad as you think. Investment banks typically determine compensation as some (mostly-)fixed percentage of revenue, so the investment banker should expect his pay to be pretty close to proportional to the amount of money he makes for the bank. This is even more true for the people near the top who are making the final decisions about where the IPO will price.
I totally agree that the process could be improved, and that a 60% first-day return is too high, but I don't think it's prima facie evidence of corrupt dealings by the underwriters.
Facebook IPO'd at $38, popped up to $45, closed at $38 on the first day, then plummeted down to $27 a week after the IPO. Now its at $107. Anything can happen.
Here's another IPO that went up 56% the first day http://techcrunch.com/2014/12/11/lending-clubs-ipo-pops-56-i... and Google Finance tells a rather somber "where are they now" story.
-> And company going IPO is leaving money on the table, which is stolen by those greedy (too polite a term for bankers) bankers.
Well, it appears both these statements can't be true. Bankers can't both be so stupid so as to leave such amazing amount of money on the table...and then also be so smart that they reap the rewards of significant underpricing.
"After the completion of this offering, our existing stockholders will continue to hold all of our issued and outstanding Class B common stock and will hold approximately % of the combined voting power of our common stock. As a result of their ownership, they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of certain amendments to our certificate of incorporation and bylaws, the approval of any merger or sale of substantially all of our assets, and certain provisions that impact their rights and privileges as Class B common stockholders. See “Description of Capital Stock.”"
Did they really only IPO less than 20% of the total company and keep the rest private?
Regardless of the actual prevalence of that strategy, I don't think we'll have a meaningful narrative about Square's IPO until the market has it for at least a few days.
"The price discount varies over time and across initial public offering (IPO) mechanisms but remains economically significant everywhere. Span- ning 4 decades and 38 countries, Ritter’s (2003) survey of international studies reports a mean first-day return (commonly equated with the offer price discount, or underpricing) ranging from 5.4 percent (Denmark) to 257 percent (China), with a median return of 20.7 percent...[the] U.S. mean return [was] 18.4 percent [from] 1960–2001"