Friday, May 11, 2007

IBKR - week 1


Not so good. Not on a trading level, nor on an analysis level. Still wondering if I got snookered or not. Don't think so. Perhaps got caught up in the dreaded hype? So here's where momo sits. Still long IBKR. Didn't sell the pricing break, even though the market popped up and gave ample time to exit at even or better after it first dropped through $30. No, this was a conscious decision to break the rule. I'd like to write it off to conflict of time horizons. On the one hand, a very fine longterm investment, and of that I'm still convinced. There are far worse places to keep your money at present than IBKR. One day when the selling has abated, it'll pop up a few dollars in a few days. But, had I sold at $30. there has been no shortage of opportunity to buy back a few dollars lower. So, call this a short-term trading failure. Momo didn't trade this one well at all.

What caught me off-guard was the amount of interest in the bid process, as reported by IBKR. They had 2.5 bids for every one that was filled at $30.01. Seemed like a sure sign of interest to me. More likely that a lot of those bidders were expecting partial fills, and over-compensated. Flippers were head over heels into IBKR. Check out the message boards on and you'll see the evidence. I saw it, and chose to ignore. Classic case of trader turned investor ;) Once the offering price broke, there has been a lot of transfer of shares going on from weak hands to strong. It'll take some time to wash out the process, perhaps a few weeks, if the markets don't top and tank in the meanwhile.

But IBKR is safely stashed away for a few years likely, and I will be looking to add when it's more clear that a bottom has gone in. I do wonder how much of the price behavior in the past week is a result of inefficiencies in the OpenIPO process, and how much due to efficiencies in that process for those cashing out, which may have led to an over-aggressive price. Valued on fundamentals, it came out pretty fully valued. This is all just in my 'at a glance' evaluation. There are some egos involved in any IPO process, which includes follow-on performance. Hambrecht doesn't offer many via OpenIPO, and perhaps the selling point is that it maximizes value for insiders which can be easily proven my lower aftermarket prices? I believe Interactive Brokers is growing and winning customers the world over, and probably could keep up that pace even if market conditions become less favorable. Highly likely that they'll bust out a few good quarters in a row right out of the gate. And also there are a lot of indexes that will need to buy shares of IBKR. That will be a constant bid below the market.

A Discussion about Initial Public Offerings

Typical IPO underwriting syndicates get heavily short a stock at offering. They over-allocate and shares go out the door sold short, often naked short. Not many public investors realize this, probably not many traders do either. If you follow the IPO market and dig into available research using google, you'll learn plenty. If you really digested an S-1, you'd see the language. They must disclose it. The underwriters short with impunity, as you'll see.

The key ingredient is the underwriter's over-allotment. If shares go out short, and the price pops and heads higher for the next month -- not a problem. If they go out short, and the price drops and heads lower -- again not a problem. In the first case they just exercise the over-allotment and use those shares to cover their short position. In the latter case, they don't even bother to exercise and make money on the short. When you consider it, this is as win:win a situation as the market can give anyone. If you watch IPOs long enough, you'll notice something about whether or not the over-allotment is exercised. The so-called green shoe option needs to be exercised within a month typically. For IPOs that are below offering price at that time, you will never see the over-allotment exercised. Never! Now you know why.

What's interesting is how this over-allotment gets used, at least to some degree. Even casually watching IPO behavior in the aftermarket you might notice that there is a shit ton of support at the offering price. This is no coincidence. Nor can it simply be attributed to a bunch of sideline money waiting to jump in at the original price. Why not wait to jump in lower? This support at the offering price is the underwriting syndicate defending their offer price. They won't defend forever, but they will defend. I've seen it in real-time in level 2 quotes. For some reason, your underwriters are a lot less insistent upon hiding their identities via ECNs for a new offering. Just look at who's holding the line at the offer price of a new issue, and 99% of the time they are a member of the syndicate. Now, they may use some left-over interest from their book to buy some of those shares, but they're also covering short at the same time. I attribute this to ego, reputation, performance, or however you care to explain it. The phenomenon is real.

The SEC is well aware of shorting (often naked) when it comes to syndicate over-allotment. I'm sure they've been convinced that this is required for market stabilization. Having never participated in an underwriting syndicate, there may be some truth to that.

I went back and looked at the IBKR S-1, and Hambrecht did give themselves certain language, although I'm not entirely sure how they would be confident to defend excessive naked short selling without a green shoe option. That's why they make the big bucks ;)

Short Sales, Stabilizing Transactions and Penalty Bids

In connection with this offering, the placement agents may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Any short sales made by the placement agents would be naked short sales. "Naked" short sales are any sales made by the placement agents that the placement agents cannot cover through exercise of any option. The placement agents must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the placement agents are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the placement agents in the open market for the purpose of pegging, fixing or maintaining the price of the common stock.

These activities by the placement agents may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, the placement agents may discontinue them at any time. These transactions may be effected on The NASDAQ Global Select Market, in the over-the-counter market or otherwise.

Now, upon further analysis, a sensible conclusion is that WR Hambrecht and fellow underwriters went naked short right out the gate until they could eventually feed real demand. I have no doubt that the numbers they published were true, but I'm sure they had a better sense of demand on a micro level. Who's to say. It's a terrible advantage they get. It helps to be aware of it. If they did get heavy on the naked short, the upside is that they can basically control the price once volume gets a little lower, and provide plenty of stability in the days and weeks ahead. At this point, I'm still in it for the long haul, and looking to double down at some point.

FSLR analysis up this weekend, promise myself to do it. That bubble is ready to pop, and I am now willing to get more vocal in my dislike for their shenanigans.

Thursday, May 3, 2007

Interactive Brokers - IBKR

Sometimes you can just spot a blockbuster from early on in the process. I remember being exposed to Sacha Baron Cohen on television in 2002. From the moment I heard he was working on a Borat film, it was just clear that the film would be a genius work. In the film business you can't always trust the reaction of the public, so I wouldn't have gone so far as to say it would be a big money maker, until I experienced it - when that became crystal clear as well - Such as it is with IB, or Interactive Borkers as I affectionately refer to them.

A few months ago I finally got around to completing the process of doing an ACATS Transfer from a legacy TD Waterhouse account to Interactive Brokers. TD Ameritrade was an absolute disaster (to former Waterhouse clients) for nearly a week when they simply migrated the two trading platforms to a single-sign-on. On the ground, it was even worse than the media reported. I couldn't log on for days on end without jumping through a lot of hoops. A friend has long recommended getting a little redundancy and diversification among brokers. For a short seller, this is absolutely necessary. IB kept on popping up among other short traders for a high availability of lending shares, and I had a further thumbs up from another heavy trader I know and trust. So I made the leap, and moved about 1/3 of my capital to IB. It was by no means a seamless process.

Took very little time to get comfortable with their tools. The client-side of their platform shows a significant amount of software engineering. It just works, in cross-platform java, and it's well designed. Can't speak about the server side, but from what I can tell it may be even better. These guys have been an electronic brokerage for 30 years, and the electronic infrastructure is not tacked on -- It's their backbone. They provide an almost real-time margin borrowing calculator, which is how they keep their own risks in order. Their platform has open APIs to enter, access, and extract data.

When I heard they had filed for an IPO, my interest was already piqued. Was this a classic case of "buy what you know"? They did a decent job of notifying customers that shares were available, and providing access to the IPO process. But this was no Vonage (Nasdaq:VG) we're talking about. I read their S-1, and watched the roadshow video (bo-ring), and gathered information in places like

and here

Renaissance Capital's ipohome

and here

WR Hambrecht

Eventually even here

Technicator.NET - IBKR Risks and Returns

From my perspective this company could perhaps be the GOOG of the trading world, and Wall St. senses it. I make the GOOG comparison with great technical appreciation for the nuances of such an analogy. Renaissance Capital says it well, "In our opinion, Interactive should be viewed as a technology provider offering broker/market making services that give customers transparency into multiple global markets." And that's exactly right.

BB&B (Big Bank and Broker) had to queue up for this OpenIPO alongside J6P (Joe Six Pack). I've personally been aware of Hambrecht's OpenIPO process since went that route, and I had a ringside seat. I thought it was a novel idea in 1999. Since GOOG went that path, the markets have grown to accept the legitimacy of this OpenIPO process. It has it's kinks, but the way they've managed it, there is still plenty of room for after-market upside IMHO. For insiders, this is quite clearly the best route to go public, and you should need no better proof than the founders of GOOG and IBKR choosing this way.

IBKR is going to be a monster. All the jabber on the message boards of is one indicator. The retail traders of IPOs are trading this one up to $40. The underwriters are masterfully leaving plenty of demand unfilled, into a limited supply. When the IPO process started the underwriters were talking 20,000,000 shares offered in the float (with perhaps 400,000,000 outstanding on a fully converted Class B basis). They upped the offer from 20,000,000 in a range of $23 to $27 to 34,5000,000 in a range of $27 to $31. Another good indicator of demand when the share offering is upped in count and range. In the end, they put 40,000,000 shares out there at $30.01 for a market cap of $1.2 billion. The best final indicator of pent up demand when this hits the market is straight from the company Press Release of Thursday May 3, 9:01 pm ET.

The following is selected information about the auction:

- The auction clearing price was $33.00.
- The offering price was $30.01.
- A total of 13,504 bids were received in the auction.
- A total of 8,282 bids were successful.
- A total of 145,514,807 shares, in total, were bid for at prices equal to or in excess of the offering price.
- The pro rata fill rate for bids was 27.5%.

That says there were 100,000,000 shares bid at or above $30.00 which
were not filled. Or, demand at the $30 price was 2.5x supply.

This means that anyone who successfully bid much more than 100 shares got filled on an average of 27.5% of their order.

A lot of latent demand went unfilled. A fuck-load, to be more precise. This is going to be a monster when it opens. I wouldn't be surprised by a first day close above $50, though certainly looking for a close in the $40s. Not sure that's a sustainable valuation, but IPOs are all about the momo.

I bought some shares at the offer price in my Interactive Borker's account and in a retirement account through Fidelity. My bid was $33. This is a stock that I'm happy to place in a drawer and check up on quarterly. Perhaps I'll revisit at par ($100 share price). I have some problems with the A/B class structure, voting rights, and as Frank at Technicator puts it, "90%+ of the IPO’s $1 billion proceeds will go straight to the founder’s wallet". You'd like to see some of the offering money go to the company, but it's not a show-stopper. Speaking of stops, set at $30 in the unlikely event these shares ever go back under offering price. Seems like such a gimmee, but you never know. Refco seemed to be the same to some.

I know this trade does not strictly fall into the momentum fading category. Never one to pigeonhole myself, this doesn't bother me one bit. If you have a problem with it, just place it in the "getting in early" category of beating the momentum to the ball. I certainly won't be chasing in the aftermarket. You'd be more likely to find me shorting against the box come lock-up expiration.

Wednesday, April 25, 2007

Anonymous Blog Commentary

Originally published in the comments of Trader Tim's excellent blog. Tim was running a poll on whether his readers would prefer continued anonymous comments. To my eyes, the comments to a blog like Tim's are a pattern of sentiment that can be analyzed and acted upon. This is only a wee small data point though, and can't be isolated ... but must be woven into a tapestry of other data.

Taking a bearish stance in general, Tim's blog has elicited comments that might best be called juvenile gloating. This Post here is my first attempt at maintaining a blog, but being an active reader, I am acutely aware of these comment-related issues. Casey Serin refers to the nasty commentators to his blog as haters, which is my source for that term. Seems as appropriate as any. Another day perhaps, I will do my level best to deconstruct Casey and the data which I draw from watching the trainwreck of a life that he lives partially in blog-blog-land. At some point in late-2006 I saw the unedited commentary from Casey's haters, as he chose to not filter anything out that day. Quite vulgar and oh so basic indeed.

I agree, the "haters" are an excellent indicator, if you know what to look for:

When they're all in your face and gloating like, that's a time to question bullish assumptions.

When the markets are trending bearish, they disappear, which is time for a bear to be cautious.

One day, the haters will be recalcitrant, and the bears will be all gloating and high-five-like. That's the day to question bearish assumptions.

There is no science to this, and it's far from being as cut and dry as I'd like to make it out to be. However, there is something to this. I use a similar type of psychological reading with the Yahoo message boards. It's just another data point.

Answered your poll as 'bearish' although like you Tim, not perma-bearish. Just bearish until economic cycle has clearly put in a downturn, and there is blood in the streets. Perhaps 12 months +/- 12 months.

3:20 PM [04/23/07]