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Comment by neosat | Hacker News Reader

That's a very misleading headline. The 'short' in this case is the fact that Morgan Stanley had additional leverage in addition to the 15% Greenshoe option to stabilize the stock.

Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.

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>Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.

You do know Morgan Stanley was fined $4.4B for their roll in selling toxic assets to their investor clients while internally selling off the same securities, which they knew were toxic.

Morgan Stanley’s reputation is they will sell their clients shit that they know is shit, and if they own the shit themselves they will also sell it off further driving down the price of the shit you bought from them. They will happily pay the fines because they make more money than the fines. They don’t care about their reputation because they don’t have one and their track record shows they can commit any abuse they want and moron investors will still give them their business.

But but but the market!

Ha - fair point! Also, I'm definitely not going to defend Morgan Stanely on the internet :)

from Matt Levine's article linked in another comment "In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.”

But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure."

The headline is entirely correct, and I don't understand your claim otherwise. No one is arguing that Morgan Stanley overpriced the IPO on purpose. They knew they had a dog on their hands and opened a short position in hopes of propping it up (though it didn't hurt to know that failing to do so would mean big profits).

> They knew they had a dog on their hands and opened a short position in hopes of propping it up

How does MS taking a short position help the stock?

My (naive) understand is that a short would add more sellers, typically driving the price down.

They went into the first day of trading >115% short so they could buy more in the open market. As they cover the short they are adding buying pressure, but if the stock is down from the offer price, also making a handsome profit on each share

> As they cover the short they are adding buying pressure

But the short added selling pressure.

Essentially as they cover the short, they are just removing the extra selling pressure they created.

Levine's thing (linked in this thread) explains it well. At the start of the IPO, the issuing entity sells more than 100% of the shares, and buys the excess back later. Normally this overallotment is called the 'greenshoe' and is set up in a way that can't lose the issuer money. In Uber's case, they would have bought back the excess shares at the IPO price from some of the founders.

Here Morgan Stanley (legally) issued even more stock at the outset, so that it could buy it back when the price fell, propping up the price.

The reason that the short didn't push the price down like you say is that it already existed at the outset. Morgan Stanley didn't sell shares after trading began, it just created them out of thin air at the beginning, in the belief that the price would drop and that they would need the extra firepower. Had they been wrong, they would have lost a lot of money on buying back the stock at a higher price.

My understanding is that these short positions were opened before the stock was listed, so they would not put any downward pressure on the market. However it did allow MS to buy more shares of Uber after open to try to support the price, without actually buying a large piece of the company. What where MS intentions, supporting the stock or profiting from an expected crash? The article has chosen a side, but delivers no evidence.

> The headline is entirely correct [...] No one is arguing that Morgan Stanley overpriced the IPO on purpose.

The headline is:

> Uber IPO underwriter so certain IPO was overpriced they shorted it themselves

These two statements are compatible. Expectations changed as the IPO date approached. No one twirled their mustachioes and said "hey let's overprice the Uber IPO".

Sure the headline is “technically” correct but it does sound to the uninitiated like they are prop trading. This short position is simple flow trading that happens in any IPO.

Technically correct is the best kind of correct!

If Morgan Stanley wanted to avoid the taint of profiteering, could it not have provided further price support by using its profit here to buy more of the stock in the open market? Of course, that would leave it with a long(er) position in a falling stock, but some would say that would be putting its money where its mouth has been.

Let me see if I'm understanding this right:

Morgan Stanley sells 115% of the stock, i.e. they sold stock that doesn't exist. Then they expect people who bought the IPO to immediately sell, and then Morgan Stanley buys that stock.

This does two things: It shows buying activity on the open market, raising the price.

And it covers their extra 15% that they sold, so all is well?

Yes unless the price doesn't tank but rises, in which case Morgan Stanley would've lost a lot of money (they have to buy back on the open market). Apparently they were certain enough that the price would fall that it was worth the risk.

The extra 15% (greenshoe) is covered either way, because they can buy it at the IPO price from founders if the stock goes up. Here we're talking about an additional exposure beyond that 15% that is not protected against losses.

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