Facebook's faceplant of an IPO has been nearly as damaging to investor confidence as the terrifying Flash Crash of May 2010.
That's according to a new survey by the TABB Group, a financial research and advisory firm in Massachusetts, which also found that overall investor confidence in the U.S. stock market is lower today than it was after the Flash Crash two years ago.
The always-prescient Huffington Post warned you the Facebook IPO would hurt confidence -- though the level of damage suggested by this survey is still surprising.
In the survey, a group of "market participants," including hedge funds, investment managers, exchanges and brokers, were asked to pick which recent market goof did the most damage to the confidence of mom-and-pop investors in the stock market. Thirty-seven percent picked the Facebook IPO, which involved first-day technical snafus and a 32 percent stock collapse in just 12 trading days. Thirty-nine percent picked the Flash Crash, which involved a shocking 1000-point collapse of the Dow Jones Industrial Average.
And market confidence overall has eroded to dangerously low levels. In 2010, 12 percent of the people TABB surveyed said their confidence in the structure of the U.S. stock market was "very high." Today, just 5 percent have very high confidence in the market. Thirty-one percent of the people surveyed said they had "weak" or "very weak" confidence in the market, compared with just 15 percent after the Flash Crash.
Thirty-five percent of those surveyed said they would be less likely to take part in the next big-name IPO as a result of the Facebook IPO.
The survey results came on the same day Rep. Darrell Issa (R-Calif.) wrote the Securities and Exchange Commission calling for reforms to the market for initial public offerings, in light of Facebook's IPO. He said the IPO process "suffers substantial flaws" that hurt the average investor.
The funny thing is, though the IPO market is indeed skewed against small investors to the benefit of insiders, it has always been thus, and the Facebook IPO is maybe not the best example of it. Typically it's the case that insiders get shares cheaply and then benefit when the stock takes off like a rocket after going public, leaving small investors shaking their fists in jealous rage.
Facebook, in contrast, made an unusually large number of shares available to the public, shares that immediately crashed in value. The stock has since managed a bit of a dead-cat bounce, to about $32, or down 16 percent from the IPO price of $38.
Of course, the Facebook insiders still made out like bandits. And the Facebook IPO was still an example of why everybody hates and distrusts Wall Street today. Relentless hype and greed pumped the price and amount of the shares issued in the IPO way too high. Top investors got word that research analysts at the stock's underwriting banks had all cut their earnings estimates for the company just days before the stock went public, news that didn't reach the average investor.
And, maybe more damaging to long-term investor confidence, the stock suffered from technological glitches on its first day of trading on the Nasdaq, glitches that had some hallmarks of the Flash Crash two years earlier, including high-speed trading that pushed the financial system to the breaking point.
“The SEC and industry have not put in reasonable ‘speed bumps’ to ensure that trading takes place in a ‘reasonably safe environment’," survey participants told the TABB Group.
Forty-four percent of those surveyed by TABB said "technology glitches" were their biggest concern, compared with 30 percent that worried most about the "IPO market structure."
Unfortunately, the technological problems seem harder to fix. You can theoretically legislate and regulate the IPO market into better behavior. But regulators readily admit they are completely outgunned when it comes to keeping track of, much less regulating, the high-speed trading that dominates more than half of all stock trading today. They can't even define what high-speed trading is yet.
The Facebook IPO was only a symptom of these broader problems, and there will be many more such episodes to come.