Facebook IPO

“I feel in my gut this AAPL is a buy.“

It’s 6:30pm on an October weekday in 2011. Tuco, Victor, Avery, a Junior Trader, and a man named Clint are trading AAPL during the afterhours. They rushed back to their screens after being out at the bar. Steve Jobs just passed away. Clint is a buyer on this news.

I’m just hanging around to watching tape trading videos, thinking I would be the last to leave.

I’ve seen Clint around but never actually trading. I thought maybe he handled MBC Education matters. Tall imposing figure, low booming Long Island accent, slicked back hair—like a character out of Boiler Room or Wall Street. I find it interesting how much stock he puts into his own experience and instinct. Tuco’s head trader and Victor and Avery had the decades of experience, but Clint was point man on AAPL right now.

After an initial down spike, AAPL trades sideways and runs out of volume. The next day it opens higher and erases the entire loss.

(continued from Camaraderie)

There was a feeling of promise heading into the Spring. MBC had trimmed the fat and many of the core traders seemed primed for a breakout in PnL. I think that’s what prompted Victor to start another book, even if it seemed wholly premature. He believed in our potential. One good month and a handful of nice trades in AAPL was enough confirmation for him, I guess.

So what happened after that?

Ups and downs. Just speaking for myself, every trading day seemed to have its own narrative. You could look at my daily PnL curve and basically see a chart of my mood. I was NOT a detached operator executing my ideas and letting them play out. Inexperienced short-term traders can get so caught up in the narrative of a recent trading spell that even our best attempts at correcting flaws and adjusting to the market can feel short-sighted and reactive. Like the story of your day/week/month/[arbitrary timeframe] is this prevailing narrative while on your hero’s journey. I’m taking profits too quickly. I’m a scared trader who has to man up and hold. Then if you get burnt on your adjustments, the narrative changes, maybe even to the exact opposite thing. Taking profits quickly is my calling card as a scalper. The stock’s momentum came back and I lost all the easy gains! Why pretend I’m a position trader?

The prevailing narrative for the desk up until trading AAPL in March, was that we were too scared. We didn’t trade high beta stocks, we kept risk way too tight, and we were far too content to scalp $250 on the open and then not give any of it back. Then several traders made a collective effort, after Tuco’s weekend meeting, to change that. In my own individual narrative, I was extremely focused on my consistency. I don’t want to be up $300-500 with careful precision scalping and curated plays, only to get greedy and overtrade into 12pm. $500 turns into $100, you try to scalp back to $300 (and then you’ll quit!) but then you go red. Fuck! I don’t want to bet all my profits on a big position either. Who am I with my lack of experience to think this stock can go anywhere wild? The feeling of blowing away early gains on tilt or oversizing sucked. So that became “the thing” to not do. Don’t blow it away. Just make $500 a day and you’ll make $10,000 a month and then $120,000 a year. That’s the path. Until the next day when AAPL plummets 30 points with a “top left to bottom right” chart and you took 3 points because you had internalized that you don’t deserve more because of your little narrative and your little arbitrary rules.

After a particularly bad trading period for the desk, there was an e-mail from Victor suggesting traders apply a 30% giveback rule. If you gave back 30% of your opening profits, you had to stop out for the day or take a very long trading timeout. Our desk had flipped 180 with its issues. Traders were now pressing too hard after early profits and giving it all back. Hence this rule. But this rule is extremely “short term narrative”–it’s all about what has been upsetting you as a trader emotionally from an arbitrary timeframe. It has nothing to do with the market and it’s next movement and your essential edge. On top of that… how does one define a sufficient amount of profits on the open to protect? When does the open end? What if there’s an A+ setup that triggers at 12pm? Is this really the thing to do?

I too would look at short-term results, see what caused the most pain and just try not to do that recent and painful thing. I’d write 5 paragraphs in my trading journal about this New Change! that will lead to a breakthrough. It was the MBC Trader Work Ethic.

There was a time where we all traded this ADSK on a large gap down. The faster traders did well playing the 3 point opening bounce with a few hundred shares. Naturally everyone else flocked to it after the easy money was made. When $30 held support for an hour plus, half the desk got into it with thousands of shares, expecting it to ramp into the close as high as $34. We got so excited we kept adding as it crept up near $31. Then it just failed to keep going.. and went back to $30… and then…

Stopped below $30. Why the fuck am I adding higher and skewing the risk-reward. Just be all-in from low $30s, sell 1/2 first push and ride the rest from break even stop. That’s me journaling. Time to go back to the consistency narrative. If I played it safe and the stock had closed at new highs, maybe I’d be writing I should add to my winners, not sell into first move. That’s how you make real money.

There was a day when QCOR plummeted after a federal probe into their main drug Acthar. Down huge. Nobody specialized in breaking news or biotech analysis so nobody got short. Victor’s at the desk looking at the risk monitor, seeing zero trades on QCOR, and he lays into us: Why is nobody short this QCOR? Are you kidding me? Best trade happening in the entire market and nobody is short. It’s your job to be short this QCOR! When I tried to push back that it’s hard to chase, he retorted that pro traders just need to get in and figure it out. Read the tape or whatever.

Thanks Victor. I took it to heart because I honestly felt my manhood questioned. New narrative: I’m a scared trader who just needs to jump into ultra volatile stocks and just figure it out. I then tried to trade super rangey stocks with breaking news and had one of my worst weeks.

Why not double down on what I’m good at instead? I’m gonna be a penny stock specialist. Remember that GALE trade? Why not bet biggest trying to fade these shitty micro-caps? New narrative, let’s go.

Run over like roadkill. Long walk and sad-eating McDonalds on a park bench after that one.

The desk as a whole still had this angst for a breakthrough. It might be just around the corner because something exciting was brewing. Facebook had filed its S1 for the most highly anticipated IPO ever. IPO’s don’t have chart histories so it was going to be pure price discovery and short-term momentum–conditions ideal for fast and nimble traders. With a $5 billion offering at $38, we were assured that it would be a massive float that we could “safely” trade. New sector, new market leading stock, let’s get hype.

The Desk Trades Facebook

The hype and fanfare around Facebook was unlike any other day. You could overhear traders huddled around the CNBC-playing TVs in the common amenities spitting out their takes. Theres upside to $50 today bro. We were witnessing history. A company that changed the fabric of society was about to go public.

It’s pre-market and there is a desk-wide discussion on how to trade FB. We didn’t have any experience trading IPOs so we looked to our elders for direction.

Tuco: If it picks up a bid it could go all day. I remember the pump on the LNKD IPO.

Avery: They reduced revenue forecasts and there’s concerns about their future profit potential. The IPO is quite big so it’s a lot of stock to distribute in a day. I’d try to trade this both ways against the key levels.

Victor: I like the risk-reward of a potential explosive IPO trade, I think we just have to be in it.

There’s some frustration from Avery that we can’t get borrows to short the IPO. Nobody else is thinking short.

I notice Clint is also trading on the outskirts away from the heart of the desk. I still don’t know anything about him other than he used to trade with Avery and Victor “back in the day”. He’s never trading unless it’s expected to be a big day.

We’re waiting, it’s supposed to open at 11am. There’s a bit of a delay and the squawk guy–what we call the real-time voice guy for our news service–updates us every 5 minutes. 30 minutes feels like two hours. My gut is feeling the lactose stab again, a sign of nerves. Literally everyone on the desk is watching the stock. I have no idea what to expect and I have no business having any expectations for a context I have never traded but I can feel the pressure mounting. I don’t want to be the loser who’s down on this. I don’t want to be the bum who bemoans that it’s trading too fast.

11:30. Facebook finally opens.

What. The. Fuck. It’s all over the place. The quotes flood into the market depth. There’s more volume than I have ever seen being printed. My platform’s level II updates in slow motion. Are these prices real? Why is the bid and ask crossed? Is my computer out of memory??!? It’s Diablo II on my shitty middle school laptop all over again. I walk into a boss cave and I’m already dead because of the load lag. My chart has the high at 45 but all I see right away are prints at $42. Everyone’s confused.

Victor: Long Facebook.

15 seconds later.

Victor: Stopped out.

Quotes sort out after a minute. The opening $42 price drops and it quickly trades to $40. There is a gazillion shares there and they are whacking it. The sellers don’t budge an inch. Just laying on it without remorse.

Victor: Long Facebook.

60 seconds later.

Victor: Stopped out.

11:50 We’re just watching Facebook sell-off straight into the $38 underwriting price. All that hype and fanfare for this. Avery bemoans the lack of short locate. How much money did we just lose not being able to short?! There is a gazillion shares again at $38 and they are whacking it. For a few minutes they are compressing it to the penny just like they did at $40. It’s going to drop to $30 today. Awful. Toxic. Morgan Stanley, this is shameful.

Victor: Long Facebook, small. Looks bad, will wait to add.

Clint: I like it here, I’m a buyer.

Some other people join in. Tuco and Eagle and the core traders join in. Me and Clockwork join in. Small amounts. If 38 drops, the IPO is an unmitigated disaster. Last ditch effort and we can’t short it so we’re buying it–this is the special strategy from a professional trading desk.

11:55 and the selling loosens up a little. It’s no longer pressing $38 to the penny. By noon it finds $39. I should sell for a point before it goes back down. That’s the trade, dust your hands after that. I sell. It climbs to $40 within two minutes after that. Fuck. I chase back in and I start flipping a bunch of shares within seconds to feel like I made back the margin that I lost selling at $39. If I scalp a cumulative point around my core position, it’ll be like I never sold it at $39 in the first place and am still long from $38.

12:00 to 12:25. It trades in a range around $40. We all think this is resistance. The open was so bad, why wouldn’t it be? There’s a lot of sad hindsight analysis that we didn’t buy a house at $38 to flip it for a clean 2 points. Of course Morgan would defend there, everyone would sue them if they let the IPO price drop on day 1! Meanwhile, I’m trading so many fucking shares in the stock trying to make 5c, 10c, 20c with turnover times often lasting 5-59 seconds. I’d buy bid at whole numbers and immediately punch in my sell prices. Pete the Market Maker.

It doesn’t stall out. It finds the “highs” at $42 again. We all run out of shares to sell at this point, barely capitalizing on “easy buy” at $38. Oops.

Can it really break higher after that horrific start?

Tuco: Bro, this FB will have a massive move over the highs. The institutions want to mark it up. I’m going to be buying pullbacks.

We all do the MBC trading thing where we “get back in”. Normal traders probably just sell and sit with their regret, we’re professional traders who buy back higher. We buy into the pullback to $41. We buy it a bit under $41 and the dip gets eaten up quickly. The stock consolidates near $42 with a clear bottleneck forming. There are buyers on the tape at $41 and then 41.25. We all start to get excited about the possibilities. The stock is so liquid that you can buy 10,000 shares without an issue. This is everything Tuco has been talking about since that meeting in February. We have to be a desk that catches the bigger move on size. Otherwise we will never make the big money. That’s the narrative. FB’s momentum has clearly shifted. This stock could reach $50 by end of day and we need to load the boat. Me, well, I’m hedging my bets and my default mode is to hold half position while flipping the other half repeatedly for small gains.

Clint: I’m taking my trade.

Is that bad? Maybe he’s just content with his profits. Victor and Avery warn us that we should wait for a clear break above $42 because it’s a key resistance level from the open. They’re old fogies, we hate listening to them at this point. There’s some fragmentation in sentiment as Tuco and some of the core traders who crushed AAPL believe in the breakout potential.

The buying starts to compress against $42. The desk’s pnl is at its absolute peak and the real move hasn’t even happened yet. We’re almost certain that $42 will break and it’ll find $45 in one move and maybe $50 later on. We don’t want to have to chase a breakout at the highs. That’s what newbs do.

It’s 1:45 and there’s a huge surge of volume. It’s right there. 42.00. The offer thins from a million shares down to a few thousand. Lift off is imminent. It HAS to go!

Just let it go, you cockroaches! We deserve this!

Ohhhhhhhhhhhhhhh……

You know that noise the whole stadium makes when the home team, with a chance to tie/win the game, strikes out for the 3rd out? That’s us. Ball game over. Everyone stopped out on size. We got ahead of ourselves.

Avery: 42 just held resistance. The trend has broken.

He calls it out as if we didn’t just see it with our own two eyes. I see Tuco shake his head but he doesn’t say anything. Weird tension between those two lately. FB compresses on $40 again. There’s some stragglers left with partial size hoping it can rally back into the close. It does no such thing and $40 drops hard. Everyone’s out now. Back to $38…where it closes at the dead low. Ugly.

I look at the risk monitor at the end of the day. A mix of red and green. A massive amount of shares traded, maybe more than I’ve ever seen… over 1 million shares by the whole desk. At the top was Clint, who bought his entire position at 38 and sold highs 41s. He left the desk hours ago. As a whole, we didn’t exactly lose but it feels like we did because of the emotional letdown.

Surprisingly, I’m in the top-5… simply because I kept trading like a market maker and didn’t overcommit for the $42 break. This is how I traded FB that day:

Over 60,000 shares traded. Over 500 trade executions. I made exactly $1000 in gross profits. Those last few dots at 3:55 where I bought against $38 and flipped it out got me there. It’s the first time I’ve ever seen a 4th digit of PnL on my MBC platform. I followed my narrative: a commitment to consistency above all. I’m exhausted.

The Facebook IPO. A lot of hype, a moment of promise, and then total disappointment. Very allegorical.

For the following weeks and months, FB bled out to lows and more lows. There was nothing but negativity on the financial blogosphere about the FB IPO disaster. HFT’s blamed. Morgan Stanley criticized. Zuckerberg criticized. Wounds were still fresh from 2008, Occupy Wall Street was still a thing, and perception was that the rug got pulled on Main Street yet again. Angry investors sued.

(edit: one of my readers, a veteran prop trader himself, pointed out that the barrage of sell orders at 1:50pm came from investors/traders seeing shares in their brokerage account after experiencing order confirmation issues at the open. Until then, no one had any idea if their initial buy orders had executed. Read about an investor’s experience here about opening order issues here and here)

Today, FB is a $300 stock and nobody ever talks about the IPO anymore other to denote what an obvious generational buying opportunity it was.

(to be continued in Pain/Time Matrix)