SERVING THE QUANTITATIVE FINANCE COMMUNITY

trackstar
Posts: 27440
Joined: August 28th, 2008, 1:53 pm

QuoteOriginally posted by: trackstar...I wonder if there could be so much volume that they would need to restore an orderly process for clearing trades...Shorts are probably going very aggressive too - with related consequences.Historic Facebook debut fall flat - Reuters May 18"The historic initial public offering of Facebook Inc did not go as planned on Friday, as the social networking company's sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close. Facebook shares began trading late Friday morning and opened 11 percent above the $38 offering price, but after peaking at about$45 slid rapidly at the end of the day to close at $38.23. The IPO was the third-largest in U.S. history and valued eight-year-old Facebook at$104 billion.The surprisingly weak debut of a stock that analysts had predicted would climb between 10 and 50 percent is not likely to dent the business prospects of Facebook, which boasts 900 million users and is upending business practices and social relationships around the world.But the unexpected developments were a clear setback for Morgan Stanley, the lead underwriter on the deal, which sources said was forced to defend the $38 price level by buying shares on the open market. Many market participants said they expected the stock to remain under pressure next week.The offering also proved an embarrassment for the NASDAQ: the opening was delayed as the exchange struggled with a huge volume of orders, and for much of the day there were long delays in order confirmation. The SEC said late Friday that it was reviewing the situation.Social media companies and Internet companies that had hoped to benefit from a Facebook halo effect were instead dragged down Friday, with social gaming giant Zynga dropping almost 15 percent.Analysts said Facebook may simply have over-reached in raising the IPO price range, pricing at the top of the range and increasing the size of the offering earlier in the week....More on the link Last edited by trackstar on May 18th, 2012, 10:00 pm, edited 1 time in total. ppauper Posts: 70239 Joined: November 15th, 2001, 1:29 pm ### Facebook it looks as though the IPO was priced exactly right if the closing price was so close to the offering price Cuchulainn Posts: 62567 Joined: July 16th, 2004, 7:38 am Location: Amsterdam Contact: ### Facebook QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: HansiHeck I hadn't even looked at my twitter feed today since I'm on holiday, sipping bear in 30 deg and sun but it's 95% facebook related since the the listing went life How many bears?Maybe a six pack?And maybe THULE, Not the cold war the Cod war Enjoy Spain. Last edited by Cuchulainn on May 18th, 2012, 10:00 pm, edited 1 time in total. Step over the gap, not into it. Watch the space between platform and train. http://www.datasimfinancial.com http://www.datasim.nl trackstar Posts: 27440 Joined: August 28th, 2008, 1:53 pm ### Facebook QuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake. Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Facebook QuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations. Cuchulainn Posts: 62567 Joined: July 16th, 2004, 7:38 am Location: Amsterdam Contact: ### Facebook Bono laughs off Facebook claims Last edited by Cuchulainn on May 18th, 2012, 10:00 pm, edited 1 time in total. Step over the gap, not into it. Watch the space between platform and train. http://www.datasimfinancial.com http://www.datasim.nl Alan Posts: 10260 Joined: December 19th, 2001, 4:01 am Location: California Contact: ### Facebook QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at$38to earn that extra yield for, let's say 6 months?

Cuchulainn
Posts: 62567
Joined: July 16th, 2004, 7:38 am
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QuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than$38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at $38to earn that extra yield for, let's say 6 months?And sell after 6 months? Step over the gap, not into it. Watch the space between platform and train. http://www.datasimfinancial.com http://www.datasim.nl Alan Posts: 10260 Joined: December 19th, 2001, 4:01 am Location: California Contact: ### Facebook yes, or at any point -- perhaps prior to some lockup exipration, or after some nice short-squeeze event, etc. Errrb Posts: 1398 Joined: December 17th, 2002, 4:18 pm ### Facebook QuoteOriginally posted by: Alan yes, or at any point -- perhaps prior to some lockup exipration, or after some nice short-squeeze event, etc.Borrowing rate at 80% per year, is more or less equivalent to no borrow at all. I doubt you will find big enough players who will pay this rate. It's interesting to watch evolution of availability of shares to borrow as underwriters unwind their inventory. They should find customers for this nice pontzy scheme. Current FB price is probably 10 times higher than it should be, it kind of reminds good old days of internet bubble. Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Facebook QuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at$38to earn that extra yield for, let's say 6 months?Interesting! But I'm skeptical on three counts. First, I'm skeptical that an underwriter would do this because lending the shares would immediately create more selling that threatens to breach the $38 price point.Second, wouldn't a non-underwriter institution considering this strategy be more likely to by FB in the 39-$45 range than at the $38 barrier?. If FB holds at$38 barrier, then much fewer bears will want to pay 80% to borrow shares.Finally, this strategy only works if the rate of reversion to FB's rational price (based on current fundamentals and a more sensible P/E ratio) is less than 0.3%/day. If FB drops to $19 in the next month and the bears return the shares, the institution has only a 6.7% gain on the loan but a 50% capital loss. Alan Posts: 10260 Joined: December 19th, 2001, 4:01 am Location: California Contact: ### Facebook QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at$38to earn that extra yield for, let's say 6 months?Interesting! But I'm skeptical on three counts. First, I'm skeptical that an underwriter would do this because lending the shares would immediately create more selling that threatens to breach the $38 price point.Second, wouldn't a non-underwriter institution considering this strategy be more likely to by FB in the 39-$45 range than at the $38 barrier?. If FB holds at$38 barrier, then much fewer bears will want to pay 80% to borrow shares.Finally, this strategy only works if the rate of reversion to FB's rational price (based on current fundamentals and a more sensible P/E ratio) is less than 0.3%/day. If FB drops to $19 in the next month and the bears return the shares, the institution has only a 6.7% gain on the loan but a 50% capital loss.1. I didn't say the underwriter's would do it.2. Well, buying cheaper seems to me less risky.3. I never said it was riskless; it is an argument for buying if you think the stock is moderately, but not grossly overpriced.Obviously it requires an opinion about the floor vs the likely lending proceeds.The point is that the stock, at this point, comes with a big (effective) dividend. Last edited by Alan on May 18th, 2012, 10:00 pm, edited 1 time in total. trackstar Posts: 27440 Joined: August 28th, 2008, 1:53 pm ### Facebook QuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at$38to earn that extra yield for, let's say 6 months?Interesting! But I'm skeptical on three counts. First, I'm skeptical that an underwriter would do this because lending the shares would immediately create more selling that threatens to breach the $38 price point.Second, wouldn't a non-underwriter institution considering this strategy be more likely to by FB in the 39-$45 range than at the $38 barrier?. If FB holds at$38 barrier, then much fewer bears will want to pay 80% to borrow shares.Finally, this strategy only works if the rate of reversion to FB's rational price (based on current fundamentals and a more sensible P/E ratio) is less than 0.3%/day. If FB drops to $19 in the next month and the bears return the shares, the institution has only a 6.7% gain on the loan but a 50% capital loss.1. I didn't say the underwriter's would do it.2. Well, buying cheaper seems to me less risky.3. I never said it was riskless; it is an argument for buying if you think the stock is moderately, but not grossly overpriced.Obviously it requires an opinion about the floor vs the likely lending proceeds.The point is that the stock, at this point, comes with a big (effective) dividend.Maybe consider paying cost of put for right to get out at$38 or better later on too.Not sure it would be cost effective and would whittle away at your profit margin in any case, of course.

Alan
Posts: 10260
Joined: December 19th, 2001, 4:01 am
Location: California
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Yes, the puts will reflect the borrowing cost to the shorts, but after you net out your lending proceeds, could make sensefor some. It would be interesting to hear from anybody, especially on a continuing basis, thecost-to-borrow, the proceeds from lending, etc. Once the options are trading (I see May 29 reported), this will give an indication, butactual institutional experience would be nice to hear about, esp. prior to that. p.s. So, trackstar, who won the contest to pick the first day price?. (Not me, pretty sure, but couldn't find that thread)
Last edited by Alan on May 18th, 2012, 10:00 pm, edited 1 time in total.

trackstar
Posts: 27440
Joined: August 28th, 2008, 1:53 pm

QuoteOriginally posted by: AlanYes, the puts will reflect the borrowing cost to the shorts, but after you net out your lending proceeds, could make sensefor some. It would be interesting to hear from anybody, especially on a continuing basis, thecost-to-borrow, the proceeds from lending, etc. Once the options are trading (I see May 29 reported), this will give an indication, butactual institutional experience would be nice to hear about, esp. prior to that. p.s. So, trackstar, who won the contest to pick the first day price?. (Not me, pretty sure, but couldn't find that thread)Ah, yes the contest! Let me see... Here is that thread: Real World Tests for Quants and Traders
Last edited by trackstar on May 18th, 2012, 10:00 pm, edited 1 time in total.