Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

IPO Fun & Games

By

As banking fees and margins have declined, we see them backing away from capital intensive activities

PrintPRINT

Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.

Prof. Succo,

I have a question about IPO's. I used to work on a sell-side equity desk but I've been out of both the sell side and the equity world for about 10 years now. Back then, when we priced an IPO and sold it to a syndicate, there was absolutely NO WAY we would let that IPO trade under the pricing. Our market maker would literally sit on the bid and buy millions of shares if necessary to protect our buyers of the deal. Letting the IPO fall under the pricing on the first day of trading was literally grounds for dismissal.

These days, I see many IPO's break their pricing within minutes of opening trading. What's going on here?

Minyan Stephen



MS-


You explain eerily well how Wall Street works.

An investment bank used to take some of the large fees they earned for underwriting IPO's (paid by the company in either direct fees or a discount on the issue) in stocks (and other securities) and use the profits to support the stock trading for a day or two. This allowed investment managers a free option to make money: if the deal was successful it could be sold into a rising market; if the deal was heavy, some of these managers would "flip" it back to the underwriter by selling it on the floor (this is why the underwriter was especially careful to choose accounts that would not sell too much stock). Trading type accounts took advantage of this and would "pay back" the underwriter in other ways.

As investment banking fees have declined over time and margins for investment banks are shrinking, we see them backing away from all types of capital intensive activities including market making. The activity you mention I think is in this category: because of less liquidity and less money being made by banks and managers alike, this activity has diminished.

Prof. Succo




< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE