9 ms·

Rigging the IPO game

122 points by brnstz 14y ago

olefoo 14y ago
This article should be read by anyone who wants to understand why things are the way they are now.
calhoun137 14y ago
Goldman didn't do what they are being accused of, and if they did there is nothing wrong with it. Besides, the best way to prevent this sort of thing from ever happening again is to not punish anyone, except possibly the guy who blew the whistle.
- paulrademacher 14y ago
  Also in the article, Goldman Sachs notes that these documents are a decade old. How could you trust (or even care about) a document from that long ago?
  - calhoun137 14y ago
    Seriously, this is a huge non story. Its not like they were downloading academic journal articles.
  - seferphier 14y ago
    It goes towards their incentive to under price the IPO. If the incentive a decade old is the same as it is today, I doubt that things would be different.
    - DoubleMalt 14y ago
      holds up Sarcasm sign
  - notahacker 14y ago
    The following decade does add the amusing perspective that the "undervalued" shares were worthless a couple of years later. I wonder if they can dredge up documents finding that Goldman Sachs was aware that its grotesque undervaluation with respect to the market demand it was fuelling was simultaneously a grotesque overvaluation with respect to eToys' fundamentals. It would be funny if they tried to use "worried about the long term potential" as a defence.
    - yummyfajitas 14y ago
      I guarantee that if you look hard, you can find either an analyst or trader at GS who thought both of these things. That's because GS is a large bank full of many divisions, quite a few of whom are chinese walled from each other. (Admittedly, some of the chinese walling has happened in past 10 years...) Banks are fragmented and individual portions of the bank don't always agree with each other. Fun fact: a certain large bank (I won't say which one) is spending ~$10-90M on an internal matching engine. This is because they spend millions on unnecessary transaction costs - trader A wants to go long and trader B wants to go short, both of them hit the public markets rather than simply trading with each other.
      - notahacker 14y ago
        Quite right, and a weakness of the original article is it doesn't make it clear how closely connected the "sales representatives" clamouring for repeat business were to the original IPO. I'm intrigued by the possibility that an individual person closely connected with pricing the IPO might have expressed a view akin to: "we've got to set a sub-market price to ensure our institutional investors make a killing on the first day, because this stock will be in trouble once the hype dies down" But still, that was over a decade ago, and I'm sure no investment banker would ever be so cynical today...
- deleted 14y ago
  [deleted]
YokoZar 14y ago
Is there a reason more companies don't do what Google did and simply sell the initial shares by dutch auction? Even without the perverse incentives, I can't see any possible advantage to hiring a wall street bank to guess a price and allocate it to only a fraction of the market.
- meric 14y ago
  If you're low profile you might want to hire a bank to help you market your shares and shop them amongst their clients.
- kapilkale 14y ago
  I suspect it is the same reason that people hire brokers to sell their houses. * Hand holding through a new, high-risk process * A scapegoat in case something goes wrong
- danmaz74 14y ago
  Being underwritten by a well known and respected bank will raise your brand on the financial market. At least if you're not a Google or Facebook...
  - acchow 14y ago
    This is the 21st century. Startup CFOs need to start realizing that this is unnecessary and the democracy of the internet is more than enough to "raise your brand" legitimately.
    - ihsw 14y ago
      There's no such thing as the democracy of the internet, that's just a new term for 'blogosphere.'
  - Agathos 14y ago
    Aaand the Efficient Market Hypothesis takes another kick to the head. This is getting brutal, folks.
- 14y ago
Narkov 14y ago
Why would a company agree to be "IPO'd" for such a low price? Doesn't the company and its shareholders need to accept some blame here? Fair enough that the bankers may have nefarious intent and they shouldn't get away with it but agreeing to such a shitty deal out of ignorance is pretty stupid.
- robryan 14y ago
  One of the reasons the company is taking on these underwriters of the IPO is because they don't actually know how much the company is going to be valued at in the market? GS would be in a way better position with their experience to know this. If they didn't play both sides of this market it would be in their interest to price is as accurately as possible.
  - azm1 14y ago
    Should not the company hire some kind of professional(s) who will observe both sides(mostly the bank) and provide objective feedback? It seems like they were jumping into unknown territory without any knowledge. I really can't believe all companies go IPO blind like I get impression from the article.
    - ahi 14y ago
      Most companies think they are hiring those professionals when they go with GS. Forcing GS to state very clearly that they do not have any fiduciary responsibility to their clients is kind of a bfd.
      - deleted 14y ago
        [deleted]
    - tatsuke95 14y ago
      I'm with you. Look at these cases; there's a lot of guesswork, it's not rocket science. If you have no clue what your business is worth, and are deferring completely to a third party, why are you even going public?
shalmanese 14y ago
Why can't companies do a slow rolling IPO? So say you sell 1M shares on day 1 at $20 which is what your underwriters price you at. Then 2M shares on day 2 at market price. Then 4M on day 3 and 8M on day 4 etc.
- chollida1 14y ago
  The biggest reason is the rules of the exchanges. All exchanges have minimum requirements for the outstanding float, share price, market value,etc. The rules aren't terribly stringent, and if you can stay above this then it might work. The problem is no underwriter would take an IPO for a million shares at say $10/share. It's just not something that they can make money on. This would require a new type of low cost underwriter. Alos remember, the reason why we can set a price on the stock is that we know the float ahead of time and we can estimate what the company is worth. How can you price a share if the amount of tradable shares is materially changing each day?
  - Evbn 14y ago
    The shares can be allocated but not offered.
    - chollida1 14y ago
      I guess it depends on your definition of allocated and offered, but to the exchange, they have minimum requirements for what is offered on their exchange. If the stock won't trade, they won't let it list, period:)
  - acchow 14y ago
    > The problem is no underwriter would take an IPO for a million shares at say $10/share. It's just not something that they can make money on. If you're offering a small fraction of the outstanding float, you don't need an underwriter because you've elected to reduce your risk. If markets are unfavourable, you raise less. Oh well. You've kept plenty of shares to try again next time. We need to get over this "go big or go home" mentality.
libovness 14y ago
Reading this immediately made me think of what Facebook did right with their IPO. Uninformed observers criticized them for overpricing their IPO, while in reality (unlike LinkedIn, eToys) they succeeded in raising as much cash as they could (for more: http://blogmaverick.com/2012/09/04/facebook-handled-their-ipo-exactly-right/ http://blogmaverick.com/2012/09/04/facebook-handled-their-ip...)
rooshdi 14y ago
“If you think eToys got screwed, what do you think happened to the country?” Sad.
- tatsuke95 14y ago
  >"“If you think eToys got screwed, what do you think happened to the country?” I don't think this guy has a clue what "happened to the country". He doesn't even seem to understand his own state of affairs.
  - joezydeco 14y ago
    “What Wall Street did to us in 1999 pales in comparison to what they did to the country in 2008,” he said." I think he understands just fine.
danmaz74 14y ago
The (not so) funny thing is that this has been a very well known problem for... ever. I'm reading "The House Of Morgan: An American Banking Dynasty and the Rise of Modern Finance" by Ron Chernow - highly recommended - and you can find the same mechanisms and scandals (with little variances) dating back at least to the 1920s. Mixing trading and underwriting in the same firm is bound to create enormous conflicts of interest, no matter how tall the internal "Chinese walls" between departments are. This is imho definitely a place where strong regulations and strong checks are needed.
- deleted 14y ago
  [deleted]
- 001sky 14y ago
  Great point. Glass-Stegal was 1930's. But some people never learn...
Tycho 14y ago
Are GS losing business due to this constant negative press which they get?
bedhead 14y ago
I've been on the buy-side for many years and the IPO market is a joke. Every time an IPO pops +20% it's irrefutable evidence that the banks are either incompetent and/or untruthful. I remain mystified that companies, particularly the hot issues like LinkedIn, ProtoLabs, et al, dont opt for auctions. It's the 8th wonder of the world. The other solution would be to be to have an adjustable underwriting fee that declines depending on how much the stock is up using the ~5 day average closing price after the IPO. If the stock was up some percent over the IPO price, say 40%, the underwriting fee would drop from 7% to 1%. Over 50%? No fees. Something along those lines would keep the banks honest. You failed (purposefully or not) to price the offering correctly and needlessly transferred hundred of million in wealth from the company to trading clients? Fine, you dont get paid. For the hot issues, trust me, there is still plenty of demand. Tons. You really think no one would buy Splunk at $35, that an IPO would fail? It happens millions of times per day already in the secondary market, so clearly there's more than enough demand. The difference would be that the hedge funds who generate utterly insane commission dollars wouldn't have an interest in the offering...it would be more buy-and-hold guys subscribing, and those folks just aren't that profitable for the bank trade desks. I used to work at one of these big funds and I've seen this all first hand and it's ridiculous.
- Evbn 14y ago
  GOOG popped over 100%, with its auction.
  - bedhead 14y ago
    I remember Google's IPO vividly. Google's stock price didnt pop much. It priced at $85 and hit $100 the first day of trading. It hung around $100 for a few weeks and then started moving steadily higher throughout the fall, in large part because they reported an insane third quarter. The auction had other problems but the pricing was largely fine. I'm talking about first day pops. These are situations that are clearly mismanaged. A stock that's supposedly worth $20 at 5pm on Tuesday is magically worth $35 at 9:30am on Wednesday despite nothing having changed. No supposedly functional market should be that inefficient. Unfortunately it's by design.
- 14y ago
driverdan 14y ago
The line I find most telling: > ...Goldman has argued that, contrary to popular belief, underwriters do not have a fiduciary duty to the companies they are underwriting. Why would anyone use a financial institution who doesn't think they have a fiduciary duty to their clients?
- acchow 14y ago
  As a consumer, you probably don't go directly to insurance companies to get underwritten for something (health, life, home, etc). You go to to a broker, who has a legal obligation to act in your best interest. The investment banks are playing the line between moral and legal obligations. They will win, of course. And then hopefully we will see "IPO brokers" and corresponding laws appear.
- tvladeck 14y ago
  Well, it's actually fairly complicated. Banks underwrite the sale of equity in an IPO, meaning that in one way or another they are providing a guarantee to the issuer - i.e., in the price of the sale, in the amount sold at a certain price, etc. So when it comes to the price of the guarantee (implicit in the terms of the arrangement), the issuer and the bank are sitting at opposite sides of the table.
- brown9-2 14y ago
  A common thing you read in articles like this (and I think Michael Lewis has mentioned it a few times) is that when clients go to Goldman Sachs, they know that Goldman is going to screw them somehow, but that the outcome in the end is still better than what they would get from any other investment bank.
erikpukinskis 14y ago
Naive question from someone who knows next to nothing about IPOs: Why not just divide the shares up amongst the existing shareholders, and just let them sell them normally on the market? Then the company/founders/vcs can just sell shares at whatever pace they want to, at whatever fair market value is. It seems like the only possible outcome of a single day sale is information asymmetry, which means someone will always get "screwed".
- dreamdu5t 14y ago
  > a single day sale is information asymmetry There is no such thing as information symmetry between any person, or in any trade. No two people on the planet have the same information. > which means someone will always get "screwed". Both parties always benefit from the trade, or the trade would not have taken place. Unless someone is deliberately misrepresenting information (fraud), then nobody gets "screwed" by trade.
  - sliverstorm 14y ago
    There is no such thing as information symmetry between any person Both parties always benefit from the trade, or the trade would not have taken place How can you say these two things, right at the same time? Does the former not contradict the latter?
    - gsmaverick 14y ago
      They are not necessarily related. Information symmetry just means that both parties know exactly the same information and neither knows more or less than the other. In a scenario where one or both parties have information that is not accessible to the other they can still engage in a trade in which each party, at least believes, it is better off given their information. A neutral/third-party observer may not come to the same conclusion but that is not relevant to this scenario.
      - sliverstorm 14y ago
        So what you mean is both parties think they benefit
topherjaynes 14y ago
When I read articles like this it's always centered around the bigger companies like Goldman and such, are there smaller companies who can handle taking an IPO public? I mean these guys are a business and need to make money, but feel like a smaller firm would be more transparent and willing to work with you and not for their other more well established clients.
pedrocr 14y ago
Reading this brought me back to all the comments surrounding the Facebook IPO. There were a bunch of people using the fact that the stock didn't pop and that they had to use the greenshoe to prop up the price as a sign of failure when in fact it was really a way to approximate the dutch auction process by overselling and then pulling back to get to market equilibrium. Then there were all the investors saying they were hurt by the IPO because it didn't pop and they couldn't sell it a few hours after buying it, so they took a loss. They then argued that this was a bad move because now Facebook stock had a bad name in the markets which would hurt more long-term than if they had just submitted to common practice by giving them some free profits for doing no work. The old days of making 4x returns in a few hours of busy work on a trading terminal must have been really nice.
javajosh 14y ago
Are there any startups - or even startup concepts - that have a chance to disrupt entities like Goldman Sachs? How is it that a firm with such a reputation keep getting new business and very high fees?
kmfrk 14y ago
I remember the article that basically made me care about IPOs was this story about the IPO of Microsoft: http://features.blogs.fortune.cnn.com/2011/03/13/inside-the-deal-that-made-bill-gates-350000000/ http://features.blogs.fortune.cnn.com/2011/03/13/inside-the-.... It's long as winter, but it actually made IPOs very relatable, not to mention exciting. It gives you a good understanding of the circus surrounding the offering price.
DenisM 14y ago
To this who ask "why not use an auction", there's been some research on that: http://insight.kellogg.northwestern.edu/article/why_do_ipo_auctions_fail http://insight.kellogg.northwestern.edu/article/why_do_ipo_a... In short, game theory strikes again: lazy auctioneers bid high blindly and hope that others will do the actual research to set the end price fairly, but those others have less incentive to do research because they are getting priced out by the lazy bums anyways. Another problem is that some bidders irrationally assume that a more popular stock is more valuable, so they too contribute to overpricing. As a result, sophisticated investors are staying away from auctions.
rumcajz 14y ago
Why isn't the price of a share set up to an unrealistically high value on the first day? The price would eventually go down to match the proper value of the share.

122 points by brnstz 14y ago

This article should be read by anyone who wants to understand why things are the way they are now.

Goldman didn't do what they are being accused of, and if they did there is nothing wrong with it. Besides, the best way to prevent this sort of thing from ever happening again is to not punish anyone, except possibly the guy who blew the whistle.

paulrademacher 14y ago
Also in the article, Goldman Sachs notes that these documents are a decade old. How could you trust (or even care about) a document from that long ago?
- calhoun137 14y ago
  Seriously, this is a huge non story. Its not like they were downloading academic journal articles.
- seferphier 14y ago
  It goes towards their incentive to under price the IPO. If the incentive a decade old is the same as it is today, I doubt that things would be different.
  - DoubleMalt 14y ago
    holds up Sarcasm sign
- notahacker 14y ago
  The following decade does add the amusing perspective that the "undervalued" shares were worthless a couple of years later. I wonder if they can dredge up documents finding that Goldman Sachs was aware that its grotesque undervaluation with respect to the market demand it was fuelling was simultaneously a grotesque overvaluation with respect to eToys' fundamentals. It would be funny if they tried to use "worried about the long term potential" as a defence.
  - yummyfajitas 14y ago
    I guarantee that if you look hard, you can find either an analyst or trader at GS who thought both of these things. That's because GS is a large bank full of many divisions, quite a few of whom are chinese walled from each other. (Admittedly, some of the chinese walling has happened in past 10 years...) Banks are fragmented and individual portions of the bank don't always agree with each other. Fun fact: a certain large bank (I won't say which one) is spending ~$10-90M on an internal matching engine. This is because they spend millions on unnecessary transaction costs - trader A wants to go long and trader B wants to go short, both of them hit the public markets rather than simply trading with each other.
    - notahacker 14y ago
      Quite right, and a weakness of the original article is it doesn't make it clear how closely connected the "sales representatives" clamouring for repeat business were to the original IPO. I'm intrigued by the possibility that an individual person closely connected with pricing the IPO might have expressed a view akin to: "we've got to set a sub-market price to ensure our institutional investors make a killing on the first day, because this stock will be in trouble once the hype dies down" But still, that was over a decade ago, and I'm sure no investment banker would ever be so cynical today...
deleted 14y ago
[deleted]

YokoZar 14y ago

Is there a reason more companies don't do what Google did and simply sell the initial shares by dutch auction? Even without the perverse incentives, I can't see any possible advantage to hiring a wall street bank to guess a price and allocate it to only a fraction of the market.

meric 14y ago
If you're low profile you might want to hire a bank to help you market your shares and shop them amongst their clients.
kapilkale 14y ago
I suspect it is the same reason that people hire brokers to sell their houses. * Hand holding through a new, high-risk process * A scapegoat in case something goes wrong
danmaz74 14y ago
Being underwritten by a well known and respected bank will raise your brand on the financial market. At least if you're not a Google or Facebook...
- acchow 14y ago
  This is the 21st century. Startup CFOs need to start realizing that this is unnecessary and the democracy of the internet is more than enough to "raise your brand" legitimately.
  - ihsw 14y ago
    There's no such thing as the democracy of the internet, that's just a new term for 'blogosphere.'
- Agathos 14y ago
  Aaand the Efficient Market Hypothesis takes another kick to the head. This is getting brutal, folks.
14y ago

Narkov 14y ago

Why would a company agree to be "IPO'd" for such a low price? Doesn't the company and its shareholders need to accept some blame here? Fair enough that the bankers may have nefarious intent and they shouldn't get away with it but agreeing to such a shitty deal out of ignorance is pretty stupid.

robryan 14y ago
One of the reasons the company is taking on these underwriters of the IPO is because they don't actually know how much the company is going to be valued at in the market? GS would be in a way better position with their experience to know this. If they didn't play both sides of this market it would be in their interest to price is as accurately as possible.
- azm1 14y ago
  Should not the company hire some kind of professional(s) who will observe both sides(mostly the bank) and provide objective feedback? It seems like they were jumping into unknown territory without any knowledge. I really can't believe all companies go IPO blind like I get impression from the article.
  - ahi 14y ago
    Most companies think they are hiring those professionals when they go with GS. Forcing GS to state very clearly that they do not have any fiduciary responsibility to their clients is kind of a bfd.
    - deleted 14y ago
      [deleted]
  - tatsuke95 14y ago
    I'm with you. Look at these cases; there's a lot of guesswork, it's not rocket science. If you have no clue what your business is worth, and are deferring completely to a third party, why are you even going public?

shalmanese 14y ago

Why can't companies do a slow rolling IPO? So say you sell 1M shares on day 1 at $20 which is what your underwriters price you at. Then 2M shares on day 2 at market price. Then 4M on day 3 and 8M on day 4 etc.

chollida1 14y ago
The biggest reason is the rules of the exchanges. All exchanges have minimum requirements for the outstanding float, share price, market value,etc. The rules aren't terribly stringent, and if you can stay above this then it might work. The problem is no underwriter would take an IPO for a million shares at say $10/share. It's just not something that they can make money on. This would require a new type of low cost underwriter. Alos remember, the reason why we can set a price on the stock is that we know the float ahead of time and we can estimate what the company is worth. How can you price a share if the amount of tradable shares is materially changing each day?
- Evbn 14y ago
  The shares can be allocated but not offered.
  - chollida1 14y ago
    I guess it depends on your definition of allocated and offered, but to the exchange, they have minimum requirements for what is offered on their exchange. If the stock won't trade, they won't let it list, period:)
- acchow 14y ago
  > The problem is no underwriter would take an IPO for a million shares at say $10/share. It's just not something that they can make money on. If you're offering a small fraction of the outstanding float, you don't need an underwriter because you've elected to reduce your risk. If markets are unfavourable, you raise less. Oh well. You've kept plenty of shares to try again next time. We need to get over this "go big or go home" mentality.

libovness 14y ago

Reading this immediately made me think of what Facebook did right with their IPO. Uninformed observers criticized them for overpricing their IPO, while in reality (unlike LinkedIn, eToys) they succeeded in raising as much cash as they could (for more: http://blogmaverick.com/2012/09/04/facebook-handled-their-ipo-exactly-right/ http://blogmaverick.com/2012/09/04/facebook-handled-their-ip...)

rooshdi 14y ago

“If you think eToys got screwed, what do you think happened to the country?” Sad.

tatsuke95 14y ago
>"“If you think eToys got screwed, what do you think happened to the country?” I don't think this guy has a clue what "happened to the country". He doesn't even seem to understand his own state of affairs.
- joezydeco 14y ago
  “What Wall Street did to us in 1999 pales in comparison to what they did to the country in 2008,” he said." I think he understands just fine.

danmaz74 14y ago

The (not so) funny thing is that this has been a very well known problem for... ever. I'm reading "The House Of Morgan: An American Banking Dynasty and the Rise of Modern Finance" by Ron Chernow - highly recommended - and you can find the same mechanisms and scandals (with little variances) dating back at least to the 1920s. Mixing trading and underwriting in the same firm is bound to create enormous conflicts of interest, no matter how tall the internal "Chinese walls" between departments are. This is imho definitely a place where strong regulations and strong checks are needed.

deleted 14y ago
[deleted]
001sky 14y ago
Great point. Glass-Stegal was 1930's. But some people never learn...

Tycho 14y ago

Are GS losing business due to this constant negative press which they get?

bedhead 14y ago

I've been on the buy-side for many years and the IPO market is a joke. Every time an IPO pops +20% it's irrefutable evidence that the banks are either incompetent and/or untruthful. I remain mystified that companies, particularly the hot issues like LinkedIn, ProtoLabs, et al, dont opt for auctions. It's the 8th wonder of the world. The other solution would be to be to have an adjustable underwriting fee that declines depending on how much the stock is up using the ~5 day average closing price after the IPO. If the stock was up some percent over the IPO price, say 40%, the underwriting fee would drop from 7% to 1%. Over 50%? No fees. Something along those lines would keep the banks honest. You failed (purposefully or not) to price the offering correctly and needlessly transferred hundred of million in wealth from the company to trading clients? Fine, you dont get paid. For the hot issues, trust me, there is still plenty of demand. Tons. You really think no one would buy Splunk at $35, that an IPO would fail? It happens millions of times per day already in the secondary market, so clearly there's more than enough demand. The difference would be that the hedge funds who generate utterly insane commission dollars wouldn't have an interest in the offering...it would be more buy-and-hold guys subscribing, and those folks just aren't that profitable for the bank trade desks. I used to work at one of these big funds and I've seen this all first hand and it's ridiculous.

Evbn 14y ago
GOOG popped over 100%, with its auction.
- bedhead 14y ago
  I remember Google's IPO vividly. Google's stock price didnt pop much. It priced at $85 and hit $100 the first day of trading. It hung around $100 for a few weeks and then started moving steadily higher throughout the fall, in large part because they reported an insane third quarter. The auction had other problems but the pricing was largely fine. I'm talking about first day pops. These are situations that are clearly mismanaged. A stock that's supposedly worth $20 at 5pm on Tuesday is magically worth $35 at 9:30am on Wednesday despite nothing having changed. No supposedly functional market should be that inefficient. Unfortunately it's by design.
14y ago

driverdan 14y ago

The line I find most telling: > ...Goldman has argued that, contrary to popular belief, underwriters do not have a fiduciary duty to the companies they are underwriting. Why would anyone use a financial institution who doesn't think they have a fiduciary duty to their clients?

acchow 14y ago
As a consumer, you probably don't go directly to insurance companies to get underwritten for something (health, life, home, etc). You go to to a broker, who has a legal obligation to act in your best interest. The investment banks are playing the line between moral and legal obligations. They will win, of course. And then hopefully we will see "IPO brokers" and corresponding laws appear.
tvladeck 14y ago
Well, it's actually fairly complicated. Banks underwrite the sale of equity in an IPO, meaning that in one way or another they are providing a guarantee to the issuer - i.e., in the price of the sale, in the amount sold at a certain price, etc. So when it comes to the price of the guarantee (implicit in the terms of the arrangement), the issuer and the bank are sitting at opposite sides of the table.
brown9-2 14y ago
A common thing you read in articles like this (and I think Michael Lewis has mentioned it a few times) is that when clients go to Goldman Sachs, they know that Goldman is going to screw them somehow, but that the outcome in the end is still better than what they would get from any other investment bank.

erikpukinskis 14y ago

Naive question from someone who knows next to nothing about IPOs: Why not just divide the shares up amongst the existing shareholders, and just let them sell them normally on the market? Then the company/founders/vcs can just sell shares at whatever pace they want to, at whatever fair market value is. It seems like the only possible outcome of a single day sale is information asymmetry, which means someone will always get "screwed".

dreamdu5t 14y ago
> a single day sale is information asymmetry There is no such thing as information symmetry between any person, or in any trade. No two people on the planet have the same information. > which means someone will always get "screwed". Both parties always benefit from the trade, or the trade would not have taken place. Unless someone is deliberately misrepresenting information (fraud), then nobody gets "screwed" by trade.
- sliverstorm 14y ago
  There is no such thing as information symmetry between any person Both parties always benefit from the trade, or the trade would not have taken place How can you say these two things, right at the same time? Does the former not contradict the latter?
  - gsmaverick 14y ago
    They are not necessarily related. Information symmetry just means that both parties know exactly the same information and neither knows more or less than the other. In a scenario where one or both parties have information that is not accessible to the other they can still engage in a trade in which each party, at least believes, it is better off given their information. A neutral/third-party observer may not come to the same conclusion but that is not relevant to this scenario.
    - sliverstorm 14y ago
      So what you mean is both parties think they benefit

topherjaynes 14y ago

When I read articles like this it's always centered around the bigger companies like Goldman and such, are there smaller companies who can handle taking an IPO public? I mean these guys are a business and need to make money, but feel like a smaller firm would be more transparent and willing to work with you and not for their other more well established clients.

pedrocr 14y ago

Reading this brought me back to all the comments surrounding the Facebook IPO. There were a bunch of people using the fact that the stock didn't pop and that they had to use the greenshoe to prop up the price as a sign of failure when in fact it was really a way to approximate the dutch auction process by overselling and then pulling back to get to market equilibrium. Then there were all the investors saying they were hurt by the IPO because it didn't pop and they couldn't sell it a few hours after buying it, so they took a loss. They then argued that this was a bad move because now Facebook stock had a bad name in the markets which would hurt more long-term than if they had just submitted to common practice by giving them some free profits for doing no work. The old days of making 4x returns in a few hours of busy work on a trading terminal must have been really nice.

javajosh 14y ago

Are there any startups - or even startup concepts - that have a chance to disrupt entities like Goldman Sachs? How is it that a firm with such a reputation keep getting new business and very high fees?

kmfrk 14y ago

I remember the article that basically made me care about IPOs was this story about the IPO of Microsoft: http://features.blogs.fortune.cnn.com/2011/03/13/inside-the-deal-that-made-bill-gates-350000000/ http://features.blogs.fortune.cnn.com/2011/03/13/inside-the-.... It's long as winter, but it actually made IPOs very relatable, not to mention exciting. It gives you a good understanding of the circus surrounding the offering price.

DenisM 14y ago

To this who ask "why not use an auction", there's been some research on that: http://insight.kellogg.northwestern.edu/article/why_do_ipo_auctions_fail http://insight.kellogg.northwestern.edu/article/why_do_ipo_a... In short, game theory strikes again: lazy auctioneers bid high blindly and hope that others will do the actual research to set the end price fairly, but those others have less incentive to do research because they are getting priced out by the lazy bums anyways. Another problem is that some bidders irrationally assume that a more popular stock is more valuable, so they too contribute to overpricing. As a result, sophisticated investors are staying away from auctions.

rumcajz 14y ago

Why isn't the price of a share set up to an unrealistically high value on the first day? The price would eventually go down to match the proper value of the share.