By Barbara Coehn
Chief Information Officer, ShadowTraders
Have you ever been invited to a big-time party, a party with lots of hype, a party you run out to buy a new outfit for so you can be dressed to the nines, a party where you are "seen"? And after you spend all this money and time to "be seen," what happens...no one bothers to come.
Welcome to the Facebook IPO (FB). All the media hoopla about how great the Facebook IPO would be. All the CNBC pundits telling us that this was going to be the hottest IPO ever, the greatest day for trading since the markets opened. What happened to their “be-seen” outfit? In the end, the underwriters actually had to buy up the shares just to keep the stock from falling below its open price of $38. No one bothered to come.
We all knew, even before it started actively trading, something was wrong. The stock was to begin trading at 11:00am EST but 11am came and went, with an announcement that there would be a 5 minute delay. And then 11:05am came and went. No trading. CNBC had announced that at 10:45, the board would open for bid/ask offers. Up to 10:45am, CNBC aired a price of $45, a full $7 above the $38 announcement. But as 11:00am approached, the price began to slide, from $45 to $44 to $43 to $42 to $40. Once the price retreated to $40, CNBC stopped showing the offer price. Instead, to fill the airspace, they showed a handful of people standing in front of the huge NASDAQ board on Times Square in New York, waiting for Facebook to begin trading, as if a handful of people would make the difference.
Once 11:05 had come and gone, CNBC also stopped airing any real news or excited coverage. They knew something was wrong. They announced that there were "booking problems," blaming the Nasdaq, like it was the Nasdaq's fault that the price was sliding and sliding fast.
Booking problems means something very generic. But what was the real problem? Behind the scenes -- there was too much selling of Facebook shares.
With that much selling going on, there was one other consideration. The European Market was about to close. If Facebook was selling off big time, let's not get the Europeans into the frenzy. Even though they specifically announced that trading would begin in another 5 minutes and then another 5 minutes, well before the European Market closed, it was clear nothing would happen until after the close took place. The Nasdaq was being blamed for "computer glitches" causing the delay. But does it take a Mensa member to know that it was no coincidence that the stock finally opened a minute or two after the European market closed.
Just after the European market closed for Friday, Facebook began to sell, and sell, and sell. There were no buyers. Even Kramer on CNBC was saying to everyone: Don't buy the stock on IPO day.
Here's one question that nagged at everyone: why Friday? Why start trading at 11am EST Friday? Why not Wednesday or Thursday when there could be some follow through the next day? Why not start trading at 9:30am when everyone could participate, including the Europeans? Were the underwriters genuinely afraid of sell-off?
The irony about this IPO is that so many investors fell victim to the hype. Demand for Facebook shares had been unrelenting, surging past supply due to the extensive media coverage. Even smaller investors were in the game...to the tune of up to 30% of the shares outstanding. Given the lackluster low-yields that stocks and bonds have been offering to date, along with the fact that the first two weeks of May drained much of the first four months gains the Market boasted, everyone was anxious to get a piece of the action. Supply was so limited that retail investors were told that unless they had a long standing relationship with one of the underwriting brokerages, chances of purchasing stock were, at best, limited.
For Facebook the company, its senior management and early investors, the IPO was a big time success, raising billions. This should have been a major win for Facebook's largest underwriters as well, such as Morgan Stanley, the lead underwriter. With fees hovering around $175 million, that's a nice boost to their quarterly bottom line. But wait, this was a party that no one attended, remember? So how much of that $175 million in fees went to prop up the $38 price? How far would the stock have fallen if not for being bought at $38? Those retail customers that were able to scarf up some of those shares, how well did they actually fair?
Monday the proof will be in the pudding. Will Facebook hold at $38 or will it begin its descent into the abyss? There won't be Nasdaq "computer glitches" to blame. The hype will be over. Facebook will just be another stock amongst all the others trading live. Will investors continue to sell, or will the retail "faithful" march in and buy up as many shares as they can? Only time will tell...