Wednesday, May 30, 2012

Institutional Investors

What are Institutional Investors?  What does it mean when a stock is owned by Institutional Investors?  Or if they have no Institutional Investors?

What are Institutional Investors?  

Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisers and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.
What got my curiosity up on this, is that the stock charts for Facebook show 0% Institutional Investors, whereas other "dot com" stocks like Linked-In show 51%, Groupon 43%, ZipCar, 50%, etc.

It is possible that the Facebook offering, being so new, has not had a chance for such investors to make themselves known, and this ratio calculated?  Or, does it mean the institional investors fled the scene, early on?  It is hard to tell.   If the latter, it is a disturbing sign.

Indeed, it appears that many sales of stock are not really consummated.   In a neat trick of flim-flammery, Morgan Stanley is allowed to consummate trades made by early (non-institutional) investors at $38 a share last week, by buying shares on the open market later on, at $32 a share.   If you sold your Facebook shares then, chances are, Morgan Stanley bought them at $32 and then handed them back to you, to sell back to them, in an endless loop.   Bottom line, they keep six bucks.

Here's how Morgan likely booked a profit on Facebook's fall: Investment bankers typically sell 15% more shares in an IPO than they actually have. For Facebook, the difference was about 63 million shares. How can they do that? Included in every IPO deal is an agreement that gives underwriters the ability to buy more stock from the company at a slight discount to the IPO price. So if the price rises after the offering, the underwriters can buy the shares from the company that they have promised to other investors, but don't actually have, and book a small profit. That's what typically happens.

But, as we all know, that's not what happened in Facebook's IPO. The stock dropped. As a result, the underwriters were able to pick up shares they didn't have in the market, rather than buying them from the company, at lower and lower prices. In effect, the underwriters were short the stock. And like all short trades, the lower the price you buy the stock back at, the more profit you make. Morgan, as the lead underwriter on the deal, sold the majority of Facebook's shares, so it booked the majority of the trading profit.

How much did Morgan make? From the outside, it's impossible to know. Facebook's shares hit $31 on Tuesday. If Morgan and the other underwriters bought back every share they had sold at that price, the Wall Street banks would have pocketed nearly $450 million. And that's on top of the roughly $170 million they split in underwriting fees on the deal.
Huh?  How is that even legal?  If you buy a share at $38, you bought it at $38.  But no, you actually bought "phantom" shares, that the seller then can buy on the open market, or from the company, at a discount, in either incidence, at a later date.   Heads they win, tails, you lose.

What did I say about not playing games where you cannot possibly win?

It appears some Institutional Investors bought into Facebook early - but perhaps have sold out already

Knight, which competes with Citadel in the wholesale market-making business, disclosed Wednesday its losses stemming from the Nadsaq glitches would be $30 million to $35 million. Citadel's own losses are of a similar magnitude, according to people familiar with the matter. Analysts have estimated total losses to Wall Street firms from the botched Facebook IPO at around $100 million. 
Hmmmm...  Is the reason Facebook is shown as "0%" Institutional Owned because they all sold out, early on?    Beats me.

But the more I read about this, the more convinced I am that this game is rigged.   And an individual trading stocks is just going to get creamed in the market, if he is not careful.  When insiders own more than 50% of a company, you have no voice in what goes on.  When a few Institutional Investors own most of the stock, you have no say as to what goes on.

Being a minority shareholder (and by that, I don't mean you are Black or Latino) really sucks.  You basically get the shaft, nearly every time.