What does this tell you?

The key facts are that 43mm shares of Facebook changed hands at $38.00, almost all of them at the bid, and another 28.5mm traded at $38.01, largely at the ask.* I am not really smart enough to interpret – humans and algorithms aware of the stabilizing bid may have thrown in their own bids at $38-even – but my best guess would be that the underwriters have eaten through half or so of the 63mm share Facebook greenshoe in stabilizing the deal at just about $38. So I seem to have lost my imaginary bet that the greenshoe would be exercised in full.

The greenshoe and stabilization are weirdly misunderstood; people cannot get over the idea that it is a prop position for the underwriters, meaning that if the stock reached $50 the underwriters would make a kajillion dollars on their 63mm share greenshoe option, while if instead it breaks through $38 in the wrong direction the underwriters would be long a lot of stock at $38. Nah. Morgan Stanley et al. sold 484mm shares for $38.00 last night, but only bought 421mm from Facebook. That left them with a 63mm short that they were hoping to cover at $37.582 (the price of the IPO and greenshoe to them) but that it sure looks like they’ve mostly covered at $38.00 – $38.01 today.

There are scenarios where the greenshoe and attendant stabilizing can be a prop winner or loser for the underwriters, where for instance they do some stabilizing below the IPO price (buying in their short below where they sold it), or where they use their own money to stabilize while holding some greenshoe firepower in reserve, hoping that the stock will recover and they’ll make money on the prop bet while still being able to exercise the greenshoe. That may have happened here. But in general greenshoes are a nice illustration of banks being long-term greedy, trading the greenshoe on behalf of clients rather than lining their own pockets – which, here, would have involved allowing the stock to break the IPO price and then buying with a $37 handle to cover the greenshoe.

The real prop winners or losers on the greenshoe, though, are the people who signed up to sell into it (page 146): VCs and early insiders like Peter Thiel, Dustin Moskovitz, Sean Parker, Accel Partners and DST, all of whom are missing out on multi-hundred-million-dollar sales and will have to take their chances when their lockups expire in 3-12 months. Given the somewhat scraggly performance of the IPO, they may regret missing the chance to sell now at $38, though they can console themselves with the stupefying amounts of money they made on the shares they did sell (page 141).

For the underwriters, this still looks pretty much like an agency trade, one in which they made $176mm though the chances of clipping the extra $26mm on the greenshoe seems remote. Here’s the split among the top underwriters:

So they’re doing okay. Not entirely to be scoffed at is the fact that, besides placing the stock, they get to trade at least some of it – maybe not quite the way they’d hoped, but still. Those volume numbers above represent a record for an IPO, and mean that each Facebook share outstanding changed hands on average about one and a half times today.** If you take the 573mm shares that traded and assume (unjustifiably but whatever) that average revenues for these trades are 1.5 cents per share, you get about $8.6mm in Street-wide trading revenue for Facebook today – about one-sixth of the way to what SecondMarket made on Facebook in four years. Public equity trading may be a crappy business, but they make it up in volume.

The biggest loser, though, may be Nasdaq, whose hiccups earlier today seem to have sparked an SEC investigation, as all hiccups do. Even worse, they may have taken Nasdaq out of the running for a BATS listing. Because if you can’t execute the biggest IPO you’ve ever done, you … wait … never mind.

Anyway, let us never speak of this again. Next week: Gupta trial!

Facebook Falls Back to IPO Price [WSJ]
Final S-1 [EDGAR]

* Or, if you like pictures, I have another one for you, which I have titled “Stock Returns Are Lognormally Distributed”:

** Alternate metric for that $23bn worth of trading: one share of FB traded for every six likes & comments posted on Facebook today.

21 comments (hidden to protect delicate sensibilities)
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Comments (21)

  1. Posted by Matt's Former MD | May 18, 2012 at 6:58 PM

    Needs a chart on the correlation between choice of sandals and IPO performance. Come on Matt, you're better than this.

  2. Posted by guest | May 18, 2012 at 9:49 PM

    Matt– you should call David Faber, who breathlessly broke the news today that the underwriters had "a billion dollars of capital" to use supporting the deal.

  3. Posted by zeerah | May 19, 2012 at 11:27 AM

    I think, since you are talking about the facebook, you should have use pictograph to make it more realistic. LOL

  4. Posted by guest | May 19, 2012 at 12:29 PM

    Tags or it didn't happen.

  5. Posted by HFguy | May 19, 2012 at 12:59 PM

    you forgot to mention the glorious gladitorial ass-whooping that Zygna got. What a fun day it was. I heard from my trigger happy HF friends that none of the underwriters were willing to write any OTC puts or even for that matter it was really hard to get shares to short.

    Lol.. come Monday and the hoodie and his suit gang will have a full week to fight with the market. that will be fun.

  6. Posted by Guest | May 19, 2012 at 5:07 PM

    This may have been interesting, but 6:35 on a Friday Matt, really?

  7. Posted by razorjamon | May 19, 2012 at 7:08 PM

    Ha, just noticed my comment got deleted. Didn't think it was that unfunny.

  8. Posted by Ben | May 19, 2012 at 8:58 PM

    Do you have a source for the "sold 484M, bought 421M", or are you just assuming this is the way it went down?

  9. Posted by TWC | May 19, 2012 at 10:22 PM

    "people cannot get over the idea that it is a prop position for the underwriters"

    Let me guess, you found these people on Facebook.

  10. Posted by Sam | May 20, 2012 at 7:27 AM

    Are you saying that the syndicate is out (off risk) and got the flotation away cleanly by using the greenshoe?

    If so kudos to them, priced to perfection indeed. But practically every other news source is saying that MS et al are still holding a lot of FB shares and the last hour of trading does point to this. Someone please clarify, preferably with some facts.

  11. Posted by Details | May 20, 2012 at 8:56 AM

    The term "green shoe" comes from the first company, Green Shoe Manufacturing now called Stride Rite Corporation,[1] to permit underwriters to use this practice in its offering.

  12. Posted by Don | May 20, 2012 at 9:12 AM

    Yes, it seems highly improbable to me that MS is not holding a large number of FB shares. They must have been shiting themselves holding the line. Would be good to have a view before Monday ;)

  13. Posted by Ben | May 20, 2012 at 9:24 AM

    Well, the last 30 min of trading certainly shows lots of (presumably) underwriter buying, but the question is whether they were going long or merely short covering having oversold the issue in the first place (in order to create this zero-risk stabilization option).

  14. Posted by Riccardo | May 20, 2012 at 9:31 AM

    Can someone answer that question? It's pretty important to understand if they got it away or not !!

    Yes the mainstream media largely missed the over allotment technicalities, but it's not clear to me at all that the IPO was a clean float.

  15. Posted by Like quant | May 20, 2012 at 11:32 AM

    Time to get out of this crap

  16. Posted by Cut Me | May 21, 2012 at 10:05 AM

    Matt, you seem to have forgotten to put the links to the other 5 pages.

  17. Posted by DFGuest | May 21, 2012 at 10:14 AM

    +1 for "Long national nightmare finally over"

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  21. Posted by go here | December 28, 2012 at 12:20 PM

    I think that I heard from my trigger happy HF friends that none of the underwriters were willing to write any OTC puts or even for that matter it was really hard to get shares to short.