Investment scalpers
Emailed on October 18th, 2019 in The Friday Forward
IPOs are cool again, but you know what's not cool? The "pop" some stocks experience in the first hours/days of trading.
That doesn't mean it was a successful IPO, that means it was priced poorly, the company left money on the table, and a few select institutions took it off said table and placed it right in their pockets.
For stock offerings, investment banks occupy the same position in the investment universe as a scalper does at a concert or football game. They essentially purchase a position at a discount, then sell that at the inevitably higher price the market demands.
No actor, player, producer or audience member enjoys knowing that a scalper has run off with money that should belong to them. The same goes for the people involved with private companies.
Buyers get hit the the L too: Genuine long-term shareholders wanting to buy large amounts of a company’s stock have been stymied because the banks allocated shares to their favorite clients. The result: these buyers usually flip their initial shares for a short-term profit and wait for a market pullback to build the position they want.
A possible solution to investment banks gobbling up value from IPOs appears to be the direct listing, pioneered in part by Barry McCarthy of Spotify. The issue, however, is that direct listings don't completely allow companies to raise funds from selling new stock, they mostly just give existing shareholders liquidity.
Bill Gurley has some great comments on direct listing consideration here worth checking out.