Comment by chollida1 | Hacker News Reader

Comment by chollida1 | Hacker News Reader

A couple of interesting things about the IPO. A Lot more the trades happening are tagged as coming from trade reporting facilities, which means they were crossed/filled by internalizes, than is normal.

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?

Yeah; this happens a lot with big tech IPOs. Typically they will spike on day 1 with lots of individual investors buying in to the hype train. 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. Company fundamentals have very little to do with share price in the first year or two of an IPO; it's almost entirely psychological.

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".

None of what you just said has any basis in reality. If you really did know all of that, you would have spent every penny you have a) buying the stock at IPO and b) selling it tomorrow and then immediately shorting it and waiting.

This isn't a binary, just because those things are true, and because they tend to happen doesn't mean they are certainties or worth betting your whole net worth on. Anything could happen. There are outside market events to consider.

Right, fine. So perhaps I should re-state my criticism as: If you know this is the case, then why not bet 2% of your net worth on every tech IPO that you magically know will pop and make huge gains vs the wider market.

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.

Anyone with a solid understanding of investment fundamentals can distinguish an IPO which will flop versus one which will stay at or above market price on the first day.

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.

Knowing how a given market situation works does not mean you should spend every penny you have betting on it. False signals do happen, and not many things are 100%, especially in finance.

knowing what people will probably do and betting your life that it will happen this time exactly as planned are different things.

It's incredibly difficult to short an IPO within the first 30 days because the SEC requires the underwriter to wait at least 30 days to lend out shares for shorting.

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.

This isn't entirely true. If you hold securities in a margin account, your broker can lend the shares out to another client of theirs to short. You have no say in the matter. It's up to your broker to balance the number of longs vs shorts internally. But you can most definitely short on day one. I've done it and my account balance only has 1 comma in it.

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.

> This isn't entirely true. If you hold securities in a margin account, your broker can lend the shares out to another client of theirs to short. You have no say in the matter.

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.

Are you sure that's not only for cash accounts. Pretty much every margin account agreement I've ever seen says that they can lend out your holdings without your explicit consent or that acceptance of the agreement is explicit consent.

Cash accounts are different creatures.

You can't short stock right after an IPO, and cannot trade options for a while either.

You can short if you can find shares, which is harder than normal on IPO day. But it is possible.

No, because it always works like that -- except when it doesn't. Financial markets are funny like that. The only hard and fast rule about fresh IPOs is that they are volatile.

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.

Umm, I'm guessing you aren't in the industry as most of what you wrote here doesn't really make sense.

> 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?

> How can a hedge fund issue options until options are legally able to trade? Short answer, they can't.

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?

"buying the stock at IPO"

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.)

This is a totally plausible theory, but I'd also point out that all dark pool trades get reported through the TRF; it's not just retail internalizers. The spread on SQ is also 1 cent, which tends to lead to more dark trading.

> A Lot more the trades happening are tagged as coming from trade reporting facilities

Where are you getting your data - a Bloomberg terminal?

Yes Bloomberg terminal, along with multiple data feeds and my own analysis tools.

How much overhang? (wondering if this a Groupon like thing where the number of shares floated was so small that any demand would have a big upswing, or if the upswing was based on a reasonable fraction of the shares outstanding.)

None of Square’s existing investors sold stock in the IPO, with the float representing just 8% of the company’s outstanding shares. [1]

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.

[1] http://fortune.com/2015/11/18/square-prices-ipo/

Square was doing the thing where they opened up their IPO to select "loyal customers," which are just normal people. Could this be part of it?

> Also supporting this thesis is the number of small and odd lot trades.

That's the norm in all stocks these days because of HFT. Even in highly liquid names.

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