Tuesday, May 22, 2012

The Existential Question Of Facebook's Shares (and should Morgan Stanley Make it a One-stock ETF?) FB; MS

We will never, unless this goes to court, know the exact mechanics of the bank's stabilization efforts.
Looking at time-and-tape from Friday my best guess was they had filled the entire short and were going long.
That would explain Monday's action, with risk managers only allowing a small amount of net cap to be expended.

From FT Alphaville:
Greenshoes, Facebook phantoms and ETF magic
Successful or not, Facebook’s IPO has taught us one very important thing over the last two days.
The blogosphere/Twittersphere knows extremely little about greenshoe IPO mechanics. And yet, because who shouts loudest makes the most waves…the idea that Morgan Stanley had “lost face” on the IPO due to its commitment to take on shares at $38 “at a burden” to itself managed to linger around far too long for comfort.

Two trading days later, we finally have at least two high-profile commentaries explaining how greenshoe dynamics really work and why it is that in the worst case scenario Morgan Stanley’s much derided “stablisation” activities will probably have left it with a neutral position (if not a positive one).
Paul Murphy explained it all in one paragraph on Friday.

It all comes down to the bank having shorted the stock (via over-allotment) at the beginning of the process. As Felix Salmon explained on Monday:
You’ll note that Morgan Stanley sold more shares than it bought. That’s the greenshoe. When you sell more shares than you buy, you’re short that stock, so when a bank exercises its greenshoe option, as Morgan Stanley did in this case, it is going short the stock in question.
Why would a company like Facebook want its banks to be short its own stock? Partly because when there’s a big short in the market, that provides upward pressure on the share price. Shorts need to cover their short position — which means they need to buy stock. But more generally, the greenshoe is a way to provide the market with a nice extra slug of shares, which everybody wants if the stock trades substantially higher than its IPO price.
Here was Matt Levine’s explanation on Dealbreaker last Friday, meanwhile:
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.
All of which is very understandable.
Though Felix Salmon goes one step further by pondering the existential nature of 63m shares — which were never issued — but sold by Morgan Stanley in the first place:
The greenshoe does, however, raise certain existential questions — not least, how can 484 million shares be sold, if only 421 million shares have been issued? Do those extra 63 million shares exist?
He says the answer is that the shares exist in a kind of quantum limbo. As he observes:
In one possible world the shares trade happily on the open market, in which case Morgan Stanley will exercise its option, and force Facebook and its investors* to cough up the last 63 million shares; at that point, they certainly do exist. In another possible world, Morgan Stanley ends up buying back those 63 million shares on the open market, thereby reducing the number of shares actually trading to the original 421 million. In that world, the 63 million shares never had much of an existence: they were sold by Morgan Stanley and then bought back by Morgan Stanley, and all that’s left at the end of the day is nothing.
We, on the other hand, would prefer to call these ‘phantom shares’. And that’s because the dynamics seriously remind us of how ETFs trade on a daily basis.

A small but important divergence into ETFs...MORE
See also:
"The Being and Nothingness Network: Social Media for Existentialists"