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.


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