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> 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 gatekee

> 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
  > "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. Assuming a roughly competitive market with n players that do not engage in direct collusion, if IPO prices are being set too low from the perspective of the companies IPOing, there's room for an additional player (n+1) to set their prices slightly higher. Assuming their ability to predict the risk on the opening bell prices is the same as the other n players' ability to predict risk, that bank will produce IPOs that are consistently favorable for the companies IPOing, and companies will choose that bank as their underwriter. Ceteris paribus, their profits would grow, not shrink. There are factors that impede this from happening perfectly in practice - such as barriers to entry for the underwriters - which is (part of) what explains why this disparity won't trend to exactly zero. But it's wrong to say that banks would get punished by either companies or their investors for responding to this disparity by raising prices - the exact opposite would happen. And in itself, that still doesn't point to widespread collusion between banks, or even any sort of implicit conspiracy.
  - nikanj 9y ago
    Not sure how you'd get that (n+1) business off the ground. Even with the current happy-go-lucky funding climate, I don't see much success in pitching the idea. "We'll take on the giant incumbents, by accepting additional risk on behalf of our clients, in return of reduced profits". I agree that there would be a solid market demand for this company. The same way there would be much demand for a telecom/isp that provides more speed at reduced price. Consumer demand isn't always the only thing needed for a business to succeed, despite what pg says.
    - chimeracoder 9y ago
      > Not sure how you'd get that (n+1) business off the ground. Even with the current happy-go-lucky funding climate, I don't see much success in pitching the idea. This is a thought experiment, designed to illustrate that auctions (which IPOs are - an auction between underwriting banks) converge towards the maximum price that individual participants would be willing to pay. You can easily extend this logic to any individual participant. > in return of reduced profits You keep saying "reduced profits". If you seriously believe that banks are artificially keeping bids low, then there would be no reduced profits - any individual bank willing to outbid the rest consistently would completely sweep the entire market, capturing all profits across the market of banks which underwrite IPOs. Of course, this won't happen, because banks aren't artificially keeping bids low, which is the whole point. You can't just point at the fact that post-opening bell prices are greater than IPO prices to show that banks are colluding with each other, because that doesn't prove anything. The current prices are completely consistent with a competitive market.
prostoalex 9y ago
> 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 While true, the company can manage that risk by limiting the amount of shares to float, and then allocate more shares for sale in a secondary offering (Tesla just did one in 2016). The game theory kicks in, though - when the float is too small, who's going to be the first sucker to bite on the buyers' side, knowing that a massive amount of shares is prepared for a secondary float shortly afterwards? I sure as heck wouldn't touch it, why not have someone else do price discovery.

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
> "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. Assuming a roughly competitive market with n players that do not engage in direct collusion, if IPO prices are being set too low from the perspective of the companies IPOing, there's room for an additional player (n+1) to set their prices slightly higher. Assuming their ability to predict the risk on the opening bell prices is the same as the other n players' ability to predict risk, that bank will produce IPOs that are consistently favorable for the companies IPOing, and companies will choose that bank as their underwriter. Ceteris paribus, their profits would grow, not shrink. There are factors that impede this from happening perfectly in practice - such as barriers to entry for the underwriters - which is (part of) what explains why this disparity won't trend to exactly zero. But it's wrong to say that banks would get punished by either companies or their investors for responding to this disparity by raising prices - the exact opposite would happen. And in itself, that still doesn't point to widespread collusion between banks, or even any sort of implicit conspiracy.
- nikanj 9y ago
  Not sure how you'd get that (n+1) business off the ground. Even with the current happy-go-lucky funding climate, I don't see much success in pitching the idea. "We'll take on the giant incumbents, by accepting additional risk on behalf of our clients, in return of reduced profits". I agree that there would be a solid market demand for this company. The same way there would be much demand for a telecom/isp that provides more speed at reduced price. Consumer demand isn't always the only thing needed for a business to succeed, despite what pg says.
  - chimeracoder 9y ago
    > Not sure how you'd get that (n+1) business off the ground. Even with the current happy-go-lucky funding climate, I don't see much success in pitching the idea. This is a thought experiment, designed to illustrate that auctions (which IPOs are - an auction between underwriting banks) converge towards the maximum price that individual participants would be willing to pay. You can easily extend this logic to any individual participant. > in return of reduced profits You keep saying "reduced profits". If you seriously believe that banks are artificially keeping bids low, then there would be no reduced profits - any individual bank willing to outbid the rest consistently would completely sweep the entire market, capturing all profits across the market of banks which underwrite IPOs. Of course, this won't happen, because banks aren't artificially keeping bids low, which is the whole point. You can't just point at the fact that post-opening bell prices are greater than IPO prices to show that banks are colluding with each other, because that doesn't prove anything. The current prices are completely consistent with a competitive market.

prostoalex 9y ago

> 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 While true, the company can manage that risk by limiting the amount of shares to float, and then allocate more shares for sale in a secondary offering (Tesla just did one in 2016). The game theory kicks in, though - when the float is too small, who's going to be the first sucker to bite on the buyers' side, knowing that a massive amount of shares is prepared for a secondary float shortly afterwards? I sure as heck wouldn't touch it, why not have someone else do price discovery.