The IPO Greenshoe Is Really A Short Position

May 23, 2012 4:12 am

Well, here is something we learnt from the Facebook fiasco err. IPO. The underwriter / lead underwriter’s Greenshoe option during the IPO is actually implemented as a short position effectively. We spotted this today:

“You’ll note that Morgan Stanley sold more shares than it bought. That’s the greenshoe. When you sell more shares than you buy, you’re short that stock, so when a bank exercises its greenshoe option, as Morgan Stanley did in this case, it is going short the stock in question.

Why would a company like Facebook want its banks to be short its own stock? Partly because when there’s a big short in the market, that provides upward pressure on the share price. Shorts need to cover their short position — which means they need to buy stock. But more generally, the greenshoe is a way to provide the market with a nice extra slug of shares, which everybody wants if the stock trades substantially higher than its IPO price.”

Statistics Source: Reuters

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