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So this is pretty lazy anti-intellectualism. Can you provide some evidence that the investment banks are colluding on IPO pricing?

by acchow 9y ago

hobs 9y ago
How is that anti-intellectualism? Not saying they are right, but criticizing wallstreet/giant tech companies for price fixing is not that.
- acchow 9y ago
  They are claiming the banks are fixing prices without offering any proof. Well, the "proof" being "we all know banks are greedy and evil, so they must be doing this"
  - hobs 9y ago
    I make no claim they are or not, simply that making a claim about banks doing something isnt anti-intellectualism, unless you believe making an unverified claim (in your eyes) is anti-intellectual. Wikipedia states "Anti-intellectualism is a hostility to and mistrust of intellect, intellectuals, and intellectualism commonly expressed as deprecation of education and philosophy or dismissal of art, literature, and science as impractical and even contemptible human pursuits.[1]" None of that is happening in the grandparent (as far as I can tell.) You can certainly accuse them of biased unverified information and demand proof, its just not anti-intellectualism.
  - davidw 9y ago
    They are quite literally setting the prices of IPO's though, by fiat, and not via an auction or some other market-oriented mechanism. I have no opinion about actual 'collusion' but the mechanism looks pretty bad seen from afar.
    - acchow 9y ago
      The banks compete against each other on price - the company gets to freely choose the underwriter and they take price into account. Do you have evidence the banks are colluding on price? Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers.
      - davidw 9y ago
        > Do you have evidence the banks are colluding on price? Nope, which is why I wrote that I have no opinion on that. Edit: I think that very direct collusion would probably not be a stable arrangement, long term. But perhaps 'not competing too hard' between a low number of competitors with big barriers to entry is realistic. > Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers. That's still a way less transparent and market-oriented option than auctioning the shares. It's a hell of a lot easier for a few banks to be 'gentlemanly' in their competition than it is for lots of people trying to get some shares at an IPO via an auction. I mean, we're discussing an IPO that was "oversubscribed" at the set price, meaning money was being left on the table, right?
    - chimeracoder 9y ago
      > They are quite literally setting the prices of IPO's though, by fiat, and not via an auction or some other market-oriented mechanism. Er, no, it's literally set by an auction (the auction occurring between the different banks who can underwrite the IPO). A bank that is consistently able to predict the IPO opening-bell price better than the others, or is willing to accept a slightly smaller cut than the others, will win the auction, and will outperform the others on average.
      - kgwgk 9y ago
        > the auction occurring between the different banks who can underwrite the IPO What do you mean? Do you have a reference?
        sah2ed 9y ago
        I wouldn't characterize the activities between banks underwriting an IPO as an auction, probably closer to a negotiation [0]. This [1] is a well-written prose from Matt Levine on the role of underwriters in working with Snap prior to their IPO. [0] https://www.bloomberg.com/view/articles/2016-01-15/uber-is-raising-more-money-from-rich-people https://www.bloomberg.com/view/articles/2016-01-15/uber-is-r... [1] https://www.bloomberg.com/view/articles/2017-03-27/banks-that-sold-snap-ipo-say-it-s-a-buy https://www.bloomberg.com/view/articles/2017-03-27/banks-tha...
        kgwgk 9y ago
        How is that related to the claim of the IPO price being set by an "auction occurring between the different banks who can underwrite the IPO"? Edit: thanks for the clarification
        sah2ed 9y ago
        I've edited my comment above to be more clear.
skywhopper 9y ago
The facts that they are the primary beneficaries of underpriced IPOs (ie, the biggest reward for the smallest risk) and that they are the all-powerful gatekeepers of the process and that most of these IPOs shoot up in price on day one (meaning that their customers are leaving huge amounts of money on the table) is a pretty good indication. If you don't count fully aligned incentives as evidence, it's at least very clearly a process ripe for collusion and corruption, and should be handled with extreme care and skepticism.
- chimeracoder 9y ago
  > The facts that they are the primary beneficaries of underpriced IPOs (ie, the biggest reward for the smallest risk) and that they are the all-powerful gatekeepers of the process and that most of these IPOs shoot up in price on day one (meaning that their customers are leaving huge amounts of money on the table) is a pretty good indication On the other hand, the entity that they are taking money from is literally the company that's IPOing (when the price shoots up, it's called leaving money on the table, because it's money that the company isn't raising in their IPO, and is instead going to the banks). There's a reasonable degree of competition between banks to underwrite an IPO, and companies have the ability to choose which bank to work with, so any conspiracy here would require actual widespread collusion between underwriters (which would be illegal the same way horizontal integration generally is in any industry). While not impossible, that's the sort of claim which warrants tangible evidence, rather than indirect evidence just from the existence of shareholder prices increasing on the opening bell.
  - nikanj 9y ago
    "Well-established protocols" can result in IPO prices being systematically set too low. Yes, theoretically a bank should be able to break the ranks, but all they would get for their trouble is smaller profits, and a potential lawsuit from investors. After all, they did diverse from the "established accounting standards" when pushing the IPO price up.
    - chimeracoder 9y ago
davidw 9y ago
I think it's simply stating the obvious: rather than using a market-based mechanism for price discovery, they pick a price to sell at. For a bunch of people who are such big fans of markets, this looks really dubious. "Markets for thee, but not for me".
- s73ver 9y ago
  Isn't that how just about everything is sold? My box of Cheerios isn't auctioned off; they picked a price. They had several factors that went into picking that price, just like those that set up the IPOs have.
  - acchow 9y ago
    Yes, and Cheerios sets their price to compete with other cereal providers. The consumer picks the company keeping the price in mind. That's how IPO pricing works too. The banks compete against each other and the company chooses their underwriter. This is how markets work. I fail to see how an IPO is "rather than using a market-based mechanism for price discovery, they pick a price to sell at". I think davidw is making some strong claims without understanding how the IPO process really works
  - davidw 9y ago
    The pricing of Cheerios doesn't seem to suffer from the principle-agent problem, though. No one but consumers really 'wins' if cheerios are underpriced. And to my knowledge they don't continue to be traded once they're bought, either, so it's sort of apples to oranges.
    - chimeracoder 9y ago
      > The pricing of Cheerios doesn't seem to suffer from the principle-agent problem, though. No one but consumers really 'wins' if cheerios are underpriced This is not an example of a principal-agent problem. There are two competitive markets: the competitive auction between underwriting banks, and the competitive market between public traders. The price between these two differs because the underwriting banks assume a great deal of risk in the process - risk which otherwise would be borne by the company. > And to my knowledge they don't continue to be traded once they're bought, either, so it's sort of apples to oranges. Breakfast cereals are definitely sold wholesale by third-party suppliers (as are apples and oranges as well).
rconti 9y ago
You started pretty aggressive and your replies are getting more so. For one, you asked for proof that banks are colluding on pricing when nobody claimed that. It's well known that the IPO company and issuer price the stock to try to get a "pop" on the date of the IPO, to toss some money the bank's way. It doesn't always work, but they do not try to price the company optimally. Similarly, the IPO company doesn't want to price it TOO low because they don't want to leave too much money on the table.
khazhoux 9y ago
> So this is pretty lazy anti-intellectualism. Ironically, your comment is also lazy anti-intellectualism. (and even more ironically, so is mine!)
qq66 9y ago
I was an intern at a Wall Street investment bank in 2004 and I remember the unbridled anger that animated any senior banker who started talking about Google and their efforts to "cut out the Street." It's not "collusion." It's simply that Wall Street banks are the ones with access to mutual funds and other buy-side investors, not tech companies. The bankers work with those investors every day, the tech companies once in their history. The behavior is enabled by what in Silicon Valley would be called a "moat."

So this is pretty lazy anti-intellectualism. Can you provide some evidence that the investment banks are colluding on IPO pricing?

by acchow 9y ago

So this is pretty lazy anti-intellectualism. Can you provide some evidence that the investment banks are colluding on IPO pricing?

hobs 9y ago

How is that anti-intellectualism? Not saying they are right, but criticizing wallstreet/giant tech companies for price fixing is not that.

acchow 9y ago
They are claiming the banks are fixing prices without offering any proof. Well, the "proof" being "we all know banks are greedy and evil, so they must be doing this"
- hobs 9y ago
  I make no claim they are or not, simply that making a claim about banks doing something isnt anti-intellectualism, unless you believe making an unverified claim (in your eyes) is anti-intellectual. Wikipedia states "Anti-intellectualism is a hostility to and mistrust of intellect, intellectuals, and intellectualism commonly expressed as deprecation of education and philosophy or dismissal of art, literature, and science as impractical and even contemptible human pursuits.[1]" None of that is happening in the grandparent (as far as I can tell.) You can certainly accuse them of biased unverified information and demand proof, its just not anti-intellectualism.
- davidw 9y ago
  They are quite literally setting the prices of IPO's though, by fiat, and not via an auction or some other market-oriented mechanism. I have no opinion about actual 'collusion' but the mechanism looks pretty bad seen from afar.
  - acchow 9y ago
    The banks compete against each other on price - the company gets to freely choose the underwriter and they take price into account. Do you have evidence the banks are colluding on price? Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers.
    - davidw 9y ago
      > Do you have evidence the banks are colluding on price? Nope, which is why I wrote that I have no opinion on that. Edit: I think that very direct collusion would probably not be a stable arrangement, long term. But perhaps 'not competing too hard' between a low number of competitors with big barriers to entry is realistic. > Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers. That's still a way less transparent and market-oriented option than auctioning the shares. It's a hell of a lot easier for a few banks to be 'gentlemanly' in their competition than it is for lots of people trying to get some shares at an IPO via an auction. I mean, we're discussing an IPO that was "oversubscribed" at the set price, meaning money was being left on the table, right?
  - chimeracoder 9y ago
    > They are quite literally setting the prices of IPO's though, by fiat, and not via an auction or some other market-oriented mechanism. Er, no, it's literally set by an auction (the auction occurring between the different banks who can underwrite the IPO). A bank that is consistently able to predict the IPO opening-bell price better than the others, or is willing to accept a slightly smaller cut than the others, will win the auction, and will outperform the others on average.
    - kgwgk 9y ago
      > the auction occurring between the different banks who can underwrite the IPO What do you mean? Do you have a reference?
      - sah2ed 9y ago
        I wouldn't characterize the activities between banks underwriting an IPO as an auction, probably closer to a negotiation [0]. This [1] is a well-written prose from Matt Levine on the role of underwriters in working with Snap prior to their IPO. [0] https://www.bloomberg.com/view/articles/2016-01-15/uber-is-raising-more-money-from-rich-people https://www.bloomberg.com/view/articles/2016-01-15/uber-is-r... [1] https://www.bloomberg.com/view/articles/2017-03-27/banks-that-sold-snap-ipo-say-it-s-a-buy https://www.bloomberg.com/view/articles/2017-03-27/banks-tha...
        kgwgk 9y ago
        How is that related to the claim of the IPO price being set by an "auction occurring between the different banks who can underwrite the IPO"? Edit: thanks for the clarification
        sah2ed 9y ago
        I've edited my comment above to be more clear.

skywhopper 9y ago

The facts that they are the primary beneficaries of underpriced IPOs (ie, the biggest reward for the smallest risk) and that they are the all-powerful gatekeepers of the process and that most of these IPOs shoot up in price on day one (meaning that their customers are leaving huge amounts of money on the table) is a pretty good indication. If you don't count fully aligned incentives as evidence, it's at least very clearly a process ripe for collusion and corruption, and should be handled with extreme care and skepticism.

chimeracoder 9y ago
> The facts that they are the primary beneficaries of underpriced IPOs (ie, the biggest reward for the smallest risk) and that they are the all-powerful gatekeepers of the process and that most of these IPOs shoot up in price on day one (meaning that their customers are leaving huge amounts of money on the table) is a pretty good indication On the other hand, the entity that they are taking money from is literally the company that's IPOing (when the price shoots up, it's called leaving money on the table, because it's money that the company isn't raising in their IPO, and is instead going to the banks). There's a reasonable degree of competition between banks to underwrite an IPO, and companies have the ability to choose which bank to work with, so any conspiracy here would require actual widespread collusion between underwriters (which would be illegal the same way horizontal integration generally is in any industry). While not impossible, that's the sort of claim which warrants tangible evidence, rather than indirect evidence just from the existence of shareholder prices increasing on the opening bell.
- nikanj 9y ago
  "Well-established protocols" can result in IPO prices being systematically set too low. Yes, theoretically a bank should be able to break the ranks, but all they would get for their trouble is smaller profits, and a potential lawsuit from investors. After all, they did diverse from the "established accounting standards" when pushing the IPO price up.
  - chimeracoder 9y ago

davidw 9y ago

I think it's simply stating the obvious: rather than using a market-based mechanism for price discovery, they pick a price to sell at. For a bunch of people who are such big fans of markets, this looks really dubious. "Markets for thee, but not for me".

s73ver 9y ago
Isn't that how just about everything is sold? My box of Cheerios isn't auctioned off; they picked a price. They had several factors that went into picking that price, just like those that set up the IPOs have.
- acchow 9y ago
  Yes, and Cheerios sets their price to compete with other cereal providers. The consumer picks the company keeping the price in mind. That's how IPO pricing works too. The banks compete against each other and the company chooses their underwriter. This is how markets work. I fail to see how an IPO is "rather than using a market-based mechanism for price discovery, they pick a price to sell at". I think davidw is making some strong claims without understanding how the IPO process really works
- davidw 9y ago
  The pricing of Cheerios doesn't seem to suffer from the principle-agent problem, though. No one but consumers really 'wins' if cheerios are underpriced. And to my knowledge they don't continue to be traded once they're bought, either, so it's sort of apples to oranges.
  - chimeracoder 9y ago
    > The pricing of Cheerios doesn't seem to suffer from the principle-agent problem, though. No one but consumers really 'wins' if cheerios are underpriced This is not an example of a principal-agent problem. There are two competitive markets: the competitive auction between underwriting banks, and the competitive market between public traders. The price between these two differs because the underwriting banks assume a great deal of risk in the process - risk which otherwise would be borne by the company. > And to my knowledge they don't continue to be traded once they're bought, either, so it's sort of apples to oranges. Breakfast cereals are definitely sold wholesale by third-party suppliers (as are apples and oranges as well).

rconti 9y ago

You started pretty aggressive and your replies are getting more so. For one, you asked for proof that banks are colluding on pricing when nobody claimed that. It's well known that the IPO company and issuer price the stock to try to get a "pop" on the date of the IPO, to toss some money the bank's way. It doesn't always work, but they do not try to price the company optimally. Similarly, the IPO company doesn't want to price it TOO low because they don't want to leave too much money on the table.

khazhoux 9y ago

> So this is pretty lazy anti-intellectualism. Ironically, your comment is also lazy anti-intellectualism. (and even more ironically, so is mine!)

qq66 9y ago

I was an intern at a Wall Street investment bank in 2004 and I remember the unbridled anger that animated any senior banker who started talking about Google and their efforts to "cut out the Street." It's not "collusion." It's simply that Wall Street banks are the ones with access to mutual funds and other buy-side investors, not tech companies. The bankers work with those investors every day, the tech companies once in their history. The behavior is enabled by what in Silicon Valley would be called a "moat."