Comment by dangero | Hacker News Reader

Comment by dangero | Hacker News Reader

I bought Facebook with a limit order when it went on sale to the general public last Friday, and I can confirm it was a terrible experience. Here's basically what happened:

I put in a limit order through tdameritrade the night before with a max price of $44. I'm in front of the computer that morning to watch my order when the IPO starts. The price spikes up to 45, then treads around low 40s. I refresh my account. My limit order has not gone through. I wait AN HOUR. Still, it has not gone through so I cancel it. Now it says, "Pending Cancellation." It remains "Pending Cancellation" for over an hour, so I try to call tdameritrade, but their lines are completely backed up with calls. Finally, the system suddenly reports that my order was accepted and I bought Facebook at 42. It's only an hour from market close by the time I see this. What this meant for me and most everyone else was that I was locked out of the market for the first 2 hours after IPO and my assets were frozen. I could neither buy nor sell. I don't think we can really know what the impact of this was on the market, but it certainly didn't instill short term confidence in the Facebook IPO and I think it definitely decreased the volume on the stock.

I'm not going to defend everything the guy said, but I do believe that NASDAQ botched the IPO badly and it may be a few months before we know what the market really values Facebook at. There may even be permanent damage done to Facebook's reputation.

There may even be permanent damage done to Facebook's reputation.

Any permanent damage done to Facebook's reputation will purely be because they overvalued the IPO, overstated earnings, bought out other internet companies at inflated valuations pre-IPO, and burned those who bought at the inflated initial valuation.

As to whether the trading system damaged confidence in Facebook - it's not always possible to get the deal you want on a stock-market, and anyone placing a limit order should know that they might get a vastly different price than the one they expected - there are disclaimers in trading systems specifically for this situation. Trading is stopped all the time by circuit breakers (see Zynga that same day for example), depends on both willing buyers and sellers at a given price, and of course depends on the trading systems not going down for whatever reason. If you're buying as a long term investment of a stock that you believe in this won't affect you. If you're speculating, particularly short-term, you should recognise that the casino is rigged against small investors - the stock market is not, and never will be, rational, fair, or efficient; it's just the least worst option we have. However I don't believe that lack of access to the stock or prices on the first day of trading has anything to do with the current price ($31 last time I looked) - that's just down to a bubble deflating and confidence evaporating as people start asking questions about the true valuation.

Frankly I think this sort of talk of the technical issues is really a way of avoiding talking about why people bought Facebook at the initial irrational PE/price which (IMHO) has farther to fall before it becomes a reasonable valuation based on their projected earnings. That's the real issue here, but one which raises hard questions about the very high valuation of many social media companies like Instagram, Facebook etc.

I don't generally disagree with what you said, and I'm largely just taking an opportunity to go on a rant.

I have to ask -- is the stock market system really "the least worst option we have"? From an interpretation of "have" being "that is implemented and running", sure, but that's just tautological. It seems easy to conjure up systems where speculation isn't rewarded like this[1]. It just tends to mean no more instant-million or billionaires made out of people who run profitable businesses.

Recall that investment was initially about sharing profit in exchange for the funds to grow a business. Part-ownership. But we made those ownable pieces sellable, and people became able to make more money by selling little pieces of companies than by holding onto them and realizing profit; the system has evolved to grease those wheels.

If we were collectively prepared to be a little less greedy and insane, the majority of this risk would go away. We don't have to trade speculatively on future expectations of the value of the ability to sell the right to take part in a company's profits. The world could exist without stock markets, and it just means that a lot of smart people might be working on real problems instead of shuffling money. That world would look very similar to ours, except that absurd fortunes may not be come by so easily.

[1] Quick ideas: Stock ownership is non-transferable, or Stock-ownership is limited-term, or Stock ownership is limited yield, or Stock ownership is transferable after a fixed period. These could favour the rich and those with knowledge of the system, so perhaps provisions about sales would be required, "X% made available for individual buyers of less than Y value" or something. Pretty much any system which removes the notion of a real time market based entirely around selling a company's stock seems to fix the problem. It appears to me that there are a myriad less worse systems, judged by the metric of how many people are injured by the system, and how badly.

Making investment less illiquid greatly increases the cost of capital, for a lot of reasons. It means you can't act on information that comes to light after the initial purchase. It also means you can't liquidate if an alternative, but better, investment comes along later (which increases the real option value you're losing by making any given investment.) Increased cost of capital means less investment, less growth, less innovation.

I'm not saying the current system is perfect, and I agree that the current system draws a disproportionate amount of talent out of the pool (although I'd argue that's mostly unrelated to the market itself). But going to a less-liquid, less-aggressively traded capital market would likely be a step backwards for everyone. If having the occasional minor clusterf..k like what happened with the FB IPO (which is still tiny compared to the "flash crash" last year) is the cost of the current system... it seems fine to me.

It is a cost/benefit like anything else. Imagine a market where a position must be held for at least one week.

Sure, there is some efficiency in capital allocation lost but how much of a cost is that really? As I understand it its a loss inasmuch as daily stock price fluctuations reflect the actual underlying of a company: not much.

What do you have on the benefit side? For one thing, you won't have the flood of people betting on whether or not Facebook will "pop."

anyone placing a limit order should know that they might get a vastly different price than the one they expected

If you place a limit order at (e.g.) $100, your order should be filled at or below $100 - no exceptions. The order will stay around until it is either filled, manually cancelled, or expires (at end of day or at a prescribed time).

A market order can be filled at an arbitrary price because you are communicating that you are willing to cross the bid-ask spread and meet the market price, even if it's moving rapidly.

Sorry this wasn't very clear. I meant that you might not get what you expected (though it will conform to the rule you set, if it completes). Stocks can be very volatile and a limit order only controls movement one way, so it doesn't protect you from (say) a huge drop in stock price just after your order.

What does what happens after your order is filled have to do with your limit order execution price?

If you want protection from price decreases after a buy, also put in a stop order (which will turn into a market order) or a stop limit order (which ensures execution at the specified limit price) but which may not execute if the price movement is highly volatile.

That makes sense.

You're absolutely right that there's nothing to protect you from downside if your (long) limit order price gets hit prior to a major nose dive in the price.

(Short sale equivalent: if your short limit order gets hit prior to a major rise in the price)

"anyone placing a limit order should know that they might get a vastly different price than the one they expected"

I don't think you understand limit orders.

http://www.sec.gov/answers/limit.htm

I think you misunderstood his comment, though admittedly the word "expected" was probably unclear. He said "might". In other words, if the market price is $38 and you place a limit order at $40, you may get $38, you may get $39, you may get $40.

So if the price is moving (upward) quickly, you will get a price in the range you implicitly specified, but you may not get the price you had hoped for.

I dont think that long (buy) limit orders are ever meant to be used that way, you would place a long limit order below the market price and it usually ends up being executed at that price even if the stock nose dives a lot more

We're not talking about retail investors getting fleeced by big traders. We're talking about $100M positions held by professional traders who were told to go pound sand by the exchange.

The questionable nature of many aspects of Facebook's business are not new -- an IPO investment in Facebook is by it's nature a speculative investment in the future. So was Netscape, the company that started the dotcom boom.

But unlike the good old days in the 90's, today we find ourselves in a new world where for-profit exchanges who handle billions of trades a day suddenly cannot handle an IPO. You have institutional investors stuck with seemingly illiquid positions in Facebook panicking to close positions poisoning the well and creating an atmosphere of ambiguity and fear.

You can't roll out the "investment is a long term endeavor" bunkum when the entire business model of NASDAQ-OMX and NYSE-EuroNext is now to operate a liquid market. The NASDAQ utterly and completely failed to operate the market correctly, and traders who expect to be able to trade quickly were hosed. Facebook, the traders, and the retail investor all suffered because of NASDAQ's incompetence.

I was just stating what happened. Sure, I don't have a problem stating why I bought it at on IPO day at 100 p/e. I bought a small stake in my retirement fund because I believe Facebook will achieve beyond 10x their current earnings in the long run and I don't think anyone can predict the best time to buy this stock with the hype around it. I plan on checking the stock price once a year not once an hour.

I had a similar experience, except I put my order in at 11 and was able to successfully cancel it at 12:30 as the order queue was processed. It took 20 minutes to process the cancellation, which Ameritrade can typcially do in less than a second.

I think you missed the subtext of the story: You got took.

Lots of shares got dumped on the muppets in the morning, they're only beginning to figure it out.

Reply on news.ycombinator.com