$100 Million: What Facebook’s Bankers Made By Shorting FBAugust 19, 2012 5:43 am
We had spotted a very specific detail around IPOs sometime back when we said that the Greenshoe option is basically a short position. We spotted some specific numbers related to the Facebook IPO today:
“The “overallotment option,” also known as the “green shoe,” is a mechanism Wall Street banks use in most IPOs. This mechanism gives the banks the option to sell up to 15% more stock than is initially expected to be sold in the IPO. The stated goal of this option is to enable the bankers to more closely match supply with demand and, thus, reduce the volatility that might otherwise follow the IPO pricing. This option also allows the bank to buy stock in the after-market without taking undue risk–thus “supporting” the price of the stock.
In other words, when there appears to be “excess” demand for stock on the IPO, the lead underwriter has the ability to sell 15% more shares than it has already agreed to sell. In selling these shares, the bank takes a short position in the stock, by selling shares it doesn’t yet own. If the bank were doing this as a “naked short”–selling shares it didn’t have a right to buy later at a specific price–the bank would be taking huge risk: The stock might go up, forcing the bank to buy back stock to cover its short at a much higher price. But the “overallotment option” allows the bank to buy another 15% of shares from the company at the IPO price, thus allowing it to sell additional stock on the IPO without taking the risk that the stock might go up.”
Read more: http://www.businessinsider.com/facebooks-bankers-shorting-facebooks-stock-2012-8#ixzz23y4MiGu5
Free money. That is the summary.