IPO Seen Deepening Investor Distrust of Stocks
Facebook Inc. (FB)’s initial public offering, plagued by trading errors and a 16 percent drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.
“This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”
Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.
“If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. (IBKR) “One of them may be with their feet.”
The IPO produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent decline through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions. Visa Inc. did best among the biggest deals, rising 45 percent.
Some retail investors still haven’t moved off the sidelines after pulling out of the market during the 2008-09 financial crisis. TheStandard & Poor’s 500 Index (SPX) has made no progress in more than a decade, currently trading at levels first seen in 1999 following two bear markets that wiped out about 50 percent from the index. The May 6, 2010, rout known as the flash crash erased $862 billion in less than 20 minutes, undermining confidence in the structure of equity markets.
Investors have withdrawn money from mutual funds that invest in U.S. stocks for five straight years as of December, according to the Investment Company Institute, a Washington- based trade group. U.S. households held about $8.1 trillion in corporate equities at the end of 2011, about 16 percent less than the $9.6 trillion they held in 2007, according to Federal Reserve data released in March.
Increased volatility, high correlation among stocks and the flash crash are among a “whole basket-load of things” that have caused retail investors to be skeptical for several years, said Ron Sloan, who oversees about $11 billion as chief investment officer of the U.S. core equity team for Atlanta- based fund manager Invesco Ltd. (IVZ) “This is just the icing on the cake.”
Patricia Arroyo, 53, a psychologist and executive coach in Boston who manages her own investments, said, “What shakes my investor confidence more than the glitches is to see all the institutional investors, insiders and favored clients get all the advantages in these situations.”
After Facebook said on May 9 that growth in advertising had failed to keep up with user gains, analysts at some banks underwriting the deal cut their earnings estimates, said people familiar with the process. The new estimates were relayed to institutional investors.
Arroyo had avoided Facebook and instead purchased about 50 shares of social-gaming company Zynga Inc. (ZNGA), speculating that a pop in Facebook’s price would benefit the stock of the San Francisco-based company. Trading of Zynga was halted twice because of volatility on the day Facebook started trading. Zynga’s stock has fallen 20 percent in the past week.
Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing. New York-based Nasdaq was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading.
Brokerages whose customers had trouble executing Facebook trades, including Boston-based Fidelity Investments and Charles Schwab Corp. (SCHW), said they are trying to resolve complaints.
“Fidelity senior management has been working with regulators, market makers and Nasdaq to represent all of our customers’ trading issues from May 18 and we will continue to do so in order to persuade Nasdaq to mitigate the impact on our customers,” Stephen Austin, a spokesman at Fidelity, said in a phone interview. Schwab also is continuing to address any concerns that remain for its customers, Michael Cianfrocca, a spokesman for the San Francisco-based brokerage, said in an e- mail.
The Facebook fallout has eroded hopes that the debut would revive the appetite for stocks among individuals. Trading in Facebook accounted for about 20 percent to 30 percent of revenue-generating trades at online brokers on May 18, Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said in an e-mailed report on May 23. Retail buying and selling on the day a company debuts is usually 2 percent to 5 percent, he wrote.
The social network accounted for 22 percent of equities volume on May 18 at online brokerageTD Ameritrade Holding Corp. (AMTD), according to Steve Quirk, a senior vice president at the Omaha, Nebraska-based company. The firm had almost 60,000 orders to trade Facebook shares before the stock opened, he said.
“For now, it appears like a missed opportunity to build sustainable retail momentum,” Repetto wrote. The technical glitches and price decline in the stock have “driven retail trading back to earth.”
Retail investors weren’t the only ones who lost money as Facebook shares declined this week.Knight Capital Group Inc. (KCG) estimated that it lost about $30 million to $35 million trading Facebook because of technical problems at Nasdaq, the firm said in a filing with the U.S. Securities and Exchange Commission on May 23. The brokerage and market maker is based inJersey City, New Jersey.
Citadel Securities, the Chicago-based broker run by hedge- fund manager Ken Griffin, lost as much as $35 million, according to a person with knowledge of the firm.
Despite trading problems and losses, many investors who have already purchased the stock are continuing to hold on, said John Dominic, vice president of trading for TradeKing, an online broker based in Fort Lauderdale, Florida.
“Most are probably taking a wait-and-see approach,” Dominic said.
‘Slow Motion’ Wreck
IPOs are often risky and expensive for investors, said Zack Shepard, managing director for Mason, Ohio-based Matson Money Inc., which manages about $3.1 billion on behalf of individual investors. He said his firm generally waits about one year before it considers investing in newly public companies.
The Facebook mess and concerns about whether the rules of the game are fair will get resolved, said Invesco’s Sloan. A lasting effect may be that individuals focus more on company fundamentals and invest in equities for the long-term, he said.
“Watching this fiasco was like watching a car wreck in slow motion,” Andrew T. Gardener, president of Tanglewood Legacy Advisors LLC, based in Houston, said in e-mailed comments. “Only a small number of investors were directly involved. The rest of us will soon get out the keys and go for a drive.”
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