New York - Just when brokers thought Mom-and-Pop investors
were getting excited about the stock market, along came Facebook.
The 17% plunge in Facebook's shares since its ballyhooed
debut last Friday, coupled with Nasdaq's mishandling of opening day trading, is
spooking the very investors who had seemed the most intrigued by the offering,
said Wall Street executives.
"The Facebook IPO is another in a series of data points
that feed concerns that the financial markets are not a safe place to be for
individual investors," said John Taft, chief executive of Royal Bank of
Canada's US wealth management division, one of 33 underwriters of the offering.
Brokerage firms have been fighting to restore investor
confidence in the markets since the financial crisis of 2008, but trading
volume has remained stubbornly weak.
Market-shattering events such as the Flash Crash of 2010,
the Bernard Madoff scam, last summer's downgrade of US government debt and the
European sovereign debt crisis have been pushing investors out of equities into
cash or bonds that yield near-zero returns.
Anticipation of the Facebook IPO had created a stir of
public interest in the offering and in stocks in general. Now, its failure is
expected to drive more retail investors away from stocks and further depress
trading volume, which lowers revenue at brokerage firms.
'You owe me'
Investors poured $33.5bn of net new money into US stock
mutual funds in the first quarter, according to Thomson Reuters Lipper. In the
last three weeks, however, they pulled out $16.3bn.
"The Facebook flop didn't help," said Jeff
Tjornehoj, Lipper's head of Americas research.
"The perception was that something good was going
on," said Anthony DeChellis, chief executive of private banking Americas
at Credit Suisse, which also had a small portion of the Facebook underwriting.
"It could have gotten people interested in the next IPO,
but the conversation now is, 'You owe me because of Facebook'."
The Facebook IPO had plenty of problems. The company
increased the size and price of the issue just before the debut, and it later
emerged that numerous analysts had cut their growth forecasts for the company -
without telling retail investors.
One result was that despite pre-IPO chatter about a scarcity
of shares, too many retail investors got a piece of the Facebook action,
brokers said.
Trading in the IPO last Friday made up 40% of daily volume
at discount brokerages, up from 2% to 5% historically for IPOs, according to
analysts at Sandler O'Neill & Partners. So-called retail investors lost an
estimated $630m in the first four days of trading.
Even insiders got pummelled
New headlines showing that even Wall Street insiders got
pummelled by the Facebook debut have stoked further doubts among small
investors.
At least four of the trading firms chosen by Nasdaq to make
markets in Facebook lost a total of more than $100m because of systems issues
in the electronic marketplace, according to one of the firms.
"It's disheartening and very scary," said Victoria
Phibbs, a day trader from Jacksonville, Florida, who cancelled an order for 400
Facebook shares through her Charles Schwab brokerage account as she watched the
price plummet on its opening day of trading.
She learned in the evening that her order was nevertheless
filled, leading to a $1 000 loss as she sold the shares. Schwab, she said,
reimbursed her commission costs.
"It's not like when our parents used to trade,"
she said, recalling a time when investors could be confident enough in the
markets to buy and hold stocks for the long term. "I feel like you can't
win as an individual investor."
Spokespersons at Nasdaq did not respond to calls for
comment. A Schwab spokesperson said the company has resolved most of its
clients' Facebook-related issues.
Brian Cabral, a United Airlines pilot from Topsfield,
Massachusetts, ordered 100 Facebook shares through a discount broker last Friday
during a layover on a flight from Tokyo to Washington, then quickly cancelled
the order.
He received a "cancel pending" notice within
minutes. But more than six hours elapsed before he received word that the
cancellation went through, a notification he said typically takes five to 10
minutes.
"I think these types of shenanigans will dissuade
people from investing in the stock market," said the 50-year-old pilot.
"You're not going to see my generation really coming back to this
market."
Nasdaq glitches add fear
RBC's Taft said the Facebook systems glitches are
particularly harmful to restoring confidence. "You can imagine the
feedback we're getting from brokers and clients," he said. "You
should be able to trust that your buy and sell orders are being filled in a
timely manner."
The securities industry is concerned that the extended
drought in stock investing will continue to erode its bottom line. Trading
commissions at retail brokerage firms dipped 9% in this year's first quarter from
a year earlier, while cash balances and investments in low-yielding bonds are
at unusually high levels.
"Credits" reflecting cash at securities firms have
grown 32% in the 24 months ended February 28, according to regulatory reports.
Balances in margin accounts - a profitable lending product
for brokers and an indication of investors' risk appetites - are 10% below last
April, according to analysts at Goldman Sachs.
The hit to brokerage firms' bottom lines from reduced
trading has been cushioned by the growth of fee-based advisory accounts and the
recovery of the broad market from the depths of the financial crisis, but
brokerage executives said distrust of the markets and trading remains a
problem.
"Investors are still spooked," said Taft, a former
chairperson of the Securities Industry and Financial Markets Association, the
US brokerage industry's principal trade group.
IPO alarms
That Facebook blew up after weeks of anticipatory headlines
is proving to be an object lesson to retail investors.
"There is an incredible amount of empirical evidence
that retail investors should not be buying IPOs," said Henry Hu, a
securities and finance professor at the University of Texas Law School.
"Insiders always know more and the pricing is
incredibly subtle."
The apparent mispricing of Facebook shares by underwriters
and the deal's large float give the impression that Wall Street enjoys
"squeezing every dime out of investors' pockets", likely hurts
Facebook's ability to sell future offerings and exposes the company and its
underwriters to litigation, he said.
IPOs are subject to Section 11 of the Securities Act of
1933, which sets higher standards of due diligence than other antifraud
provisions of the securities law.
"Section 11 is promised land for plaintiffs'
attorneys," said Hu, who was the first head of the Securities and Exchange
Commission's division of risk, strategy and financial innovation.
SEC chairperson Mary Schapiro told reporters on Tuesday that
there is still "a lot of reason to have confidence in our markets and in
the integrity of how they operate," but one of her predecessors was less
cheery.
"It's an event with long-lasting negative implications
for an industry that can ill afford this kind of blemish," former SEC
chairperson Arthur Levitt said in an interview.