Sunday, May 20, 2012
Joe and Mary Investor Log On For Facebook Shares
WIth close to a billion users around the globe, newly-public Facebook was a natural to be embraced by small-fry investors.
So it’s small wonder that the action is hot and heavy at online brokerages that cater to Main Street stock buyers.
Online brokers geared up for a busy day Friday as some of those IPO shares hit the market around 11:30 am EDT as some trading problems delayed the stock’s scheduled 11:05 am opening on Nasdaq.
In reading through the prospectus and parsing the legalese, it appears that Facebook (ticker: FB) wanted to make certain that mom and pop investors were able to buy shares. There’s an uncommon focus on retail allocations.
E*Trade Financial’s senior vice president Christopher Larkin says that his firm is able to offer a unique and differentiated distribution channel, and is considered more cost-effective than the usual institutional banks.
“It’s exciting to offer IPOs to our customers,” Larkin says.
E*Trade (ETFC) customers were able to find the Facebook offering in their IPO Center. To indicate an interest in participating, customers must have a funded account with the broker, then go through an eligibility questionnaire that considers their investment experience, objectives, financial background, and corporate affiliations. If the customer’s responses pass muster, the next step is to place a conditional limit order for a minimum of 50 shares.
A Barron’s reader gave us the details of his experience with E*Trade’s IPO process. He placed an order for 200 shares at $40 per share, amending his order after the offering price was increased on Tuesday, and was informed early this morning that he will get 50 shares. His 50 shares appeared in his portfolio listing prior to the open at the offering price of $38 per share.
“I had wanted 100 shares, so I bid for 200,” he says.
Larkin was not willing to disclose the specifics behind E*Trade’s allocation process, but says it includes the customer’s asset level, tenure as an E*Trade customer, and past behavior. E*Trade customers are encouraged to hold the stock for at least 30 days.
E*Trade’s past IPOs include eBay (EBAY), Google (GOOG) and Morningstar (MORN), among others.
Fidelity customers were also put through a questionnaire after downloading the Facebook prospectus. Though they aren’t a direct underwriter, Fidelity is distributing some shares through their exclusive arrangement with Deutsche Bank. Spokesman Steve Austin says, “We can’t meet customer demand with the popular IPOs. The Deutsche Bank allocation is reserved for customers with $500,000 in assets or at least 36 trades in the previous 12 months.”
Fidelity also will distribute shares that they receive through another arrangement with private-equity firm Kohlberg Kravis Roberts); this block will be made available to customers of with over $100,000 in certain assets outside 401(k) accounts.
Larkin says that the number of shares each broker is allowed to distribute is never disclosed. The final prospectus will show the shares each broker or bank has agreed to accept, and should give an indication of the order of magnitude, but it’s not a specific allocation. Larkin notes, “The number in the prospectus tells you how many shares each entity is obliged to purchase if the deal goes pear-shaped. But they’re not the final allocations.”
One official very familiar with the prospectus noted that the offering was designed to make sure there were allocations across the board, avoiding the usual focus on institutional allocations. There was a cap on the number of shares an individual could purchase, says this official who requested that his name not be used. “I know brokers would love to throw everybody a bone, but you obviously want to give a bigger bone to your better customers,” he says.
If you miss out on scoring Facebook IPO shares, take heart. E*Trade’s Larkin says that “we actively go out and speak to companies about participating in these offerings. We’ll continue to see if there are opportunities going forward.”
Zecco’s CEO Michael Raneri notes that his firm is the only one that lets Facebook users actually place stock trades from within Facebook. In advance of his firm’s merger with rival TradeKing, Raneri says,
“The Facebook IPO lets us shine a brighter light on that capability,” Raneri says. “It’s a great opportunity.”
Published on Barron’s Online “Weekday Trader,” May 18, 2012.