It’s only been a few days since the Facebook IPO, and much has been written about the saga of both Morgan Stanley and NASDAQ in their handling of this now infamous event. For me, this truly exposed some of the real flaws that we have in our IPO process, but that’s a topic for another day. What I’d like to talk about is how sad it makes me that Wall Street just doesn’t get the damage they continue to inflict on a critical component of our financial markets, the retail investor.
This event exposed two issues in my opinion that once again reflect Wall Street’s decade-long focus on favoring the firm over the client. First, the idea that several of the bankers were out calling their largest clients to tell them that they were going to lower their estimates in the days and hours before the official IPO is just offensive. I guarantee no retail investor, even those with sizeable assets, received that information. Worse, it’s another example of Wall Street’s willingness to ignore the “spirit” of recent regulation and exploit its loopholes. Rules designed to make the IPO and overall investment process more fair can be cumbersome, but they help to create an investing environment that supports confidence in the system. This blatant violation of the “spirit” of the regulation must be dealt with immediately by the SEC. Sadly, over the last few years the SEC hasn’t shown much backbone in attacking the issues that are turning our markets into one massive quant algorithm, but that’s again a topic for another day.
My second issue with this deal is the willingness of the Street to “stick it to the retail guy” one last time. While our firm is more focused on the buy-side investor, we still believe the retail investor is an important part of the overall equation. However, over the last few years, extremely volatile markets, high frequency trading, and black swans in many forms have led to a consistent decline in the participate rate of retail investors in equities. Given the massive audience that Facebook has with various cross sections of our society, it seemed like this IPO was a great opportunity to get the retail investor back in the markets.
Personally, I was worried about this IPO because in the week that led up to the event a handful of unusual things happened. First, my wife’s small IRA was invited to participate (she’s never been offered an IPO in the ten years that this account has existed). Then three friends who invest only as a hobby called on the same day and asked me if they should accept the offer to participate. Thankfully all four stayed away. If the deal hadn’t been so aggressively priced and then re-priced, I’d have no problem with approaching this natural affinity group and attempting to tie them into the long-term success of the company. That makes a lot of sense actually and you could argue that having investors who love the product should make for a more stable investor base years from now. But optically, the way this whole deal unfolded looks horrible and sadly it’s likely pushed this generation’s average retail investor out of the equity markets for a very long time.
It’s time for Wall Street to wake up. Retail investors are a critical component of a highly functioning equity market and need to be embraced, not manipulated. In my opinion, the following three things need to happen to bring our markets back to equilibrium:
While frustrated, I do remain hopeful that the high profile nature of the Facebook saga will actually inspire some of the change in behavior and SEC action that will bring about effective change and make the IPO/investment process fairer in general.