Shorting Facebook: Fifty Shades of Grey
If you thought Facebook was a screaming “sell”, could you have shorted its shares on the day of its IPO?
That depends on who you ask.
In order to short a stock, an investor would need to borrow a stock from his/her brokerage firm and sell those borrowed shares into the market.
There is a fee, of course, associated with borrowing those shares. The seller is speculating that the stock will go down far enough and fast enough to recoup the cost of borrowing those shares. “Naked” shorting — selling shares that you have not arranged to borrow — is illegal if not, immoral.
In order for a broker to have shares available to lend, the stock must be available in customer accounts.
In the case of an initial public offering, that generally happens on the trade date plus three business days for settlement — commonly referred to as T+3.
Facebook , the social media juggernaut started trading on Friday which makes Wednesday, May 23 the first day that those trades settle — securities are delivered to buyers and payments of money are made to sellers. Brokers should now know exactly how many shares that they have available to lend into the market.
But here’s the grey — market watchers say that it is possible that shares were sold “short” as early as the first day of the IPO.
John Tabacco, CEO of locatestock.com says that “demand to borrow [was] coming from small to mid-size hedge funds and technical traders” as early as the first day of the IPO. Tabacco’s platform, Matador locates shares of Facebook that are available to short — he is not the broker. And where was that stock on the day of the IPO? Look to the underwriters or, syndicate group that brought the company public, he says.
Alex Brog, spokesperson for the research firm, Data Explorers writes via email:
“It is possible to undertake covered short selling immediately post flotation, but the share needs to be borrowed beforehand. Supply is very tight as not all the shares have filtered into lending programs and are available to be borrowed immediately. Further, restrictions have been placed on some prime broker’s holdings, but others will be able to lend their allocations.”
In other words, all but the very well connected investor is unable to short shares of an IPO until the third day past settlement.
Via email, Gregory DePetris, co-Founder and Chief Strategic Officer of Quadriserv confirms that T+3 is the earliest that his firm will make a market to lend shares of Facebook.“…now that FB has settled at DTCC and OCC [our central counterparty] has made the listing available so it can be cleared, today [Wednesday] is the first day for borrows/loans of FB on the AQS platform.”
DePetris says that the market to borrow shares saw “activity” on his AQS trading platform at a 10-percent “rebate” or, in other words, the cost of borrowing shares was about 10-percent on an annualized basis.
For comparison, in the first three months following the Groupon IPO, the range traded on the same platform was approximately a rebate of 20 to a rebate of 85 — much more expensive indicating that investors were more anxious to borrow shares to short of GRPN than they are of FB.
Bottom line: the average investor can now buy or, sell shares of Facebook.