Source: The Wall Street Journal
As traders at Morgan Stanley were frantically trying to shore up Facebook Inc.’s share price following the company’s initial public offering, other managers on the deal were helping short sellers bet that the newly minted stock would fall.
Trading desks at Goldman Sachs Group Inc. and J.P. Morgan Chase Co., two of the firms that helped Morgan Stanley underwrite the IPO, were among those lending out Facebook shares that hedge funds needed for short sales, according to people familiar with the matter.
The role of the firms in enabling short sellers in Facebook’s stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.
In a short sale, investors sell borrowed stock, hoping the shares fall so they can buy the stock at a lower price, return the shares and pocket the difference.
Clients of Goldman, J.P. Morgan and other banks were also helping contribute to a downdraft in Facebook’s shares.
The decline in the stock in the days after the IPO added to widespread anger among investors over the handling of the IPO after trading was disrupted by glitches on the first day.
Morgan Stanley, the lead underwriter, did not lend shares, according to people familiar with the matter.
Facebook shares were priced at $38 last Thursday. They held above that level last Friday as Morgan Stanley helped support the stock.
But they fell 11 percent Monday and a further 8.9 percent Tuesday, providing the opportunity for a rich profit for short sellers. The stock rebounded Wednesday and ended 4:00pm trading at $33.03 on Thursday.
Many small traders said they were not aware they were even allowed under securities law to short sell a stock so soon after an IPO. In fact, there are no rules that bar the short selling of new stock.
Last Friday, at least 25 percent of trading volume in Facebook shares — more than 143 million shares — were short sales, according to data from exchanges that handled 94 percent of Facebook’s total trading volume over the first four days. On Wednesday short selling accounted for at least 36 percent of total volume.