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42 Comments:
neosat said 2 months ago:

That's a very misleading headline. The 'short' in this case is the fact that Morgan Stanley had additional leverage in addition to the 15% Greenshoe option to stabilize the stock.

Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.

will_brown said 2 months ago:

>Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.

You do know Morgan Stanley was fined $4.4B for their roll in selling toxic assets to their investor clients while internally selling off the same securities, which they knew were toxic.

Morgan Stanley’s reputation is they will sell their clients shit that they know is shit, and if they own the shit themselves they will also sell it off further driving down the price of the shit you bought from them. They will happily pay the fines because they make more money than the fines. They don’t care about their reputation because they don’t have one and their track record shows they can commit any abuse they want and moron investors will still give them their business.

neosat said 2 months ago:

Ha - fair point! Also, I'm definitely not going to defend Morgan Stanely on the internet :)

kingraoul3 said 2 months ago:

But but but the market!

neosat said 2 months ago:

from Matt Levine's article linked in another comment "In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.”

But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure."

idlewords said 2 months ago:

The headline is entirely correct, and I don't understand your claim otherwise. No one is arguing that Morgan Stanley overpriced the IPO on purpose. They knew they had a dog on their hands and opened a short position in hopes of propping it up (though it didn't hurt to know that failing to do so would mean big profits).

Flammy said 2 months ago:

> They knew they had a dog on their hands and opened a short position in hopes of propping it up

How does MS taking a short position help the stock?

My (naive) understand is that a short would add more sellers, typically driving the price down.

idlewords said 2 months ago:

Levine's thing (linked in this thread) explains it well. At the start of the IPO, the issuing entity sells more than 100% of the shares, and buys the excess back later. Normally this overallotment is called the 'greenshoe' and is set up in a way that can't lose the issuer money. In Uber's case, they would have bought back the excess shares at the IPO price from some of the founders.

Here Morgan Stanley (legally) issued even more stock at the outset, so that it could buy it back when the price fell, propping up the price.

The reason that the short didn't push the price down like you say is that it already existed at the outset. Morgan Stanley didn't sell shares after trading began, it just created them out of thin air at the beginning, in the belief that the price would drop and that they would need the extra firepower. Had they been wrong, they would have lost a lot of money on buying back the stock at a higher price.

spiantino said 2 months ago:

They went into the first day of trading >115% short so they could buy more in the open market. As they cover the short they are adding buying pressure, but if the stock is down from the offer price, also making a handsome profit on each share

robocat said 2 months ago:

> As they cover the short they are adding buying pressure

But the short added selling pressure.

Essentially as they cover the short, they are just removing the extra selling pressure they created.

Xixi said 2 months ago:

My understanding is that these short positions were opened before the stock was listed, so they would not put any downward pressure on the market. However it did allow MS to buy more shares of Uber after open to try to support the price, without actually buying a large piece of the company. What where MS intentions, supporting the stock or profiting from an expected crash? The article has chosen a side, but delivers no evidence.

johnmaguire2013 said 2 months ago:

> The headline is entirely correct [...] No one is arguing that Morgan Stanley overpriced the IPO on purpose.

The headline is:

> Uber IPO underwriter so certain IPO was overpriced they shorted it themselves

idlewords said 2 months ago:

These two statements are compatible. Expectations changed as the IPO date approached. No one twirled their mustachioes and said "hey let's overprice the Uber IPO".

said 2 months ago:
[deleted]
formercoder said 2 months ago:

Sure the headline is “technically” correct but it does sound to the uninitiated like they are prop trading. This short position is simple flow trading that happens in any IPO.

idlewords said 2 months ago:

Technically correct is the best kind of correct!

mannykannot said 2 months ago:

If Morgan Stanley wanted to avoid the taint of profiteering, could it not have provided further price support by using its profit here to buy more of the stock in the open market? Of course, that would leave it with a long(er) position in a falling stock, but some would say that would be putting its money where its mouth has been.

ars said 2 months ago:

Let me see if I'm understanding this right:

Morgan Stanley sells 115% of the stock, i.e. they sold stock that doesn't exist. Then they expect people who bought the IPO to immediately sell, and then Morgan Stanley buys that stock.

This does two things: It shows buying activity on the open market, raising the price.

And it covers their extra 15% that they sold, so all is well?

michaelscott said 2 months ago:

Yes unless the price doesn't tank but rises, in which case Morgan Stanley would've lost a lot of money (they have to buy back on the open market). Apparently they were certain enough that the price would fall that it was worth the risk.

idlewords said 2 months ago:

The extra 15% (greenshoe) is covered either way, because they can buy it at the IPO price from founders if the stock goes up. Here we're talking about an additional exposure beyond that 15% that is not protected against losses.

airstrike said 2 months ago:

As always, I'll shamelessly advertise Matt Levine's column:

https://www.bloomberg.com/opinion/articles/2019-05-15/wework...

The second story is (again) on Uber and definitely worth the read if you want to understand more

leroy_masochist said 2 months ago:

From Levine's story this morning:

"If you were...inclined to be critical...you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money."

treis said 2 months ago:

This doesn't make sense. Naked shorting a stock drives down the price in the market by increasing the supply of the stock. It in no way supports the price of the stock. In fact, it's the exact opposite. It's a bet that the price goes down below the IPO price. Sell today at the IPO price of $45 in the hopes that you can buy it for less than that before you have to return the share.

More realistically, Morgan Stanley makes money as a middle man and just want to sell as many shares as they can.

hmate9 said 2 months ago:

Yes, they made money from the commissions as well as shorting the stock and later buying it back for cheaper.

csours said 2 months ago:

I'm very happy with my impression that Uber has to sleep in the bed they made - but I think there will be plenty of friction and disappointment coming out of this IPO.

Specifically, if Morgan Stanley had come up with, say $38 as the share price for IPO, Uber would have found a new bank for their IPO. Morgan Stanley (or Bank X) can provide different IPO services, but the bank is not really responsible for the stock price.

robocat said 2 months ago:

Matt Levine (money stuff http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s... ) said:

And yet more Uber Huh. Here’s Leslie Picker at CNBC:

"Uber’s underwriters, led by Morgan Stanley, were so worried the company’s initial public offering had run into trouble, they deployed a nuclear option ahead of the deal last week, so they could provide extra support for the stock, four people with knowledge of the move said."

This level of support, known as a “naked short,” is a technique that goes above and beyond the traditional help a new offering can get.

In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.”

But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure.

The naked short,[5], is a fully at-risk way to support the deal: The underwriters sell even more stock short at the deal price, and then buy it back in the open market if the stock goes down or up. If it goes down, they make money. If it goes up, they lose money. If it goes up a lot, they lose a lot of money.

Most IPO stocks go up in their first few days, and many go up quite a lot. Underwriters generally price IPOs for a nice early pop. So naked shorts are fairly uncommon. Underwriters only go naked short on an IPO if they are pretty sure that it is a dud, one of the minority of offerings that will quickly trade below the IPO price.

But it is hard to communicate that. While Morgan Stanley was deciding to go naked short the Uber IPO, it was also putting out happy noises about how much demand there was and about how the deal would be priced conservatively to ensure a nice pop. There is a fine line to walk here: None of those statements seem to have been untrue (surely the underwriters had at least three times as many orders as they had shares, which is actually not that great, and the deal was priced near the low end of the already conservative-seeming range), but the overall implication was that they were confident that the stock would go up. They were not confident that it would go up. In fact, they were so confident that it would go down that they put their own money at risk on that bet. But they didn’t lie to anyone. They were just marketing; the underwriters were doing what they could to make people excited about Uber’s stock, so that those people would want to buy the stock, so that it would go up in the aftermarket. An IPO is a sentiment-driven process, and the underwriters’ optimism or pessimism is contagious; if you want the deal to go well you have to say that it’s going well. Without lying, I mean. The worse it is going, the harder that is to do.

On the other hand:

"Some of the bankers tried to console market participants prior to the opening of trading by telling them that there would be additional support from the naked short, said one of the people, who asked not to be named discussing private conversations."

If you’re telling some people “buy as much as you can at $45, this deal is hot,” and telling other people (in “private conversations”) “this deal is a dog but at least we have a naked short,” then that is awkward.[6]

The other awkward thing is of course that the underwriters made money on their naked short; the more the stock went down, the more money they made. (And the bigger their naked short was—the more sure they were that the stock would go down—the more money they made.) This is not the point of the trade; as far as Uber’s underwriters are concerned, the naked short was a noble and self-sacrificing effort, done at considerable risk to themselves, to stabilize the stock and protect the interests of their issuer and investor clients. But, yeah, they made money on it. Depending on how big the naked short was and when they covered it, it’s quite plausible that Uber’s underwriters made more in trading profits than their $106.2 million underwriting fees.[7]

If you were … inclined to be critical … you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money.

snarf21 said 2 months ago:

Thanks for this clear description. It feels like in this case they made a naked short out of fear but with a hedge. "As long as we don't lose more than 100M if it pops, we'd straddled the fence quite nicely. We make money either way and have some ability to protect people buying it at $45." They don't want to stop doing IPOs so this is the only perspective that makes sense to me.

hacknat said 2 months ago:

This is nutty. I believe abovethelaw that this is legal, I just don't understand how.

KasianFranks said 2 months ago:

The float was also over sized at 290M shares while Lyft's was at 15M shares.

ganeshkrishnan said 2 months ago:

How did these "naked shorts" clear the trading floor if there was no one selling them? What is the real technicality here as "naked shorts" are not illegal per se.

airstrike said 2 months ago:

MS as the underwriter sold more than 100% of the shares, which means it was effectively shorting.

Also worth noting "naked shorts" and "naked shorting" are two different things... https://www.bloomberg.com/opinion/articles/2019-05-15/wework...

ganeshkrishnan said 2 months ago:

Interesting tidbit. I was not aware of the difference

yborg said 2 months ago:

Wall Street firms don't have "customers", there are only marks.

ggg2 said 2 months ago:

since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars) what is the difference on sizing it on $1 or $50? both are overpriced in a pure analysis (i.e. ignoring market excitement)

deminature said 2 months ago:

>since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars)

Really tired of reading this - its thoroughly debunked in the S1, which nobody seems to have read.

mywittyname said 2 months ago:

The S1 does say:

> We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.

> We have incurred significant losses since inception. We incurred operating losses of $4.0 billion and $3.0 billion in the years ended December 31, 2017 and 2018, and as of December 31, 2018, we had an accumulated deficit of $7.9 billion. We will need to generate and sustain increased revenue levels and decrease proportionate expenses in future periods to achieve profitability in many of our largest markets, including in the United States, and even if we do, we may not be able to maintain or increase profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: [...]

So I can under why people keep saying that, even if it is a gross exaggeration.

But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost, but they do have a negative EBITA and are going into debt to fund necessary expansion.

It's silly for people to claim they have no prospect of making money, but Uber is certainly a risky investment at this point.

Marazan said 2 months ago:

But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost

Cool, so if Uber had no employees, infrastructure or marketing costs it would make money?

liquidise said 2 months ago:

Can you specify which claim(s) you are tired of? As someone who has tracked the entire Uber S1 from a safe distance with popcorn instead of investment money, i'm legitimately curious.

Marazan said 2 months ago:

It currently has no profits. This is unarguable. So you must be certain it has future profits.

Where do these future profits come from?

at-fates-hands said 2 months ago:

The underwriter sets the offering price based on the amount of capital the company wants to raise and the level of demand from investors.

The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s best institutional clients, and some are reserved for the company’s “friends and family.” So most investors' only option is to buy in the open market when the shares start trading.

The day an IPO is released, buy and sell orders pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price; otherwise they open lower.

jahlove said 2 months ago:

> The opening price is set by supply and demand.

Is it though, if the underwriter is using a naked short to put an artificial floor on the price of the stock?

airstrike said 2 months ago:

Expectation of future profits, but you say

> no prospect of making a profit

which is an unsubstantiated claim.