Saturday, May 5, 2007

Interactive Brokers and the OpenIPO

I've written about buying IPOs as one of my investment strategies. This past week, I was allocated shares in the Interactive Brokers (Nasdaq: IBKR) IPO. Interactive Brokers is an electronic brokerage that allows direct access for trading stocks, options, futures, bonds, and currency instruments (forex) in worldwide markets. Unlike a traditional IPO where the offer price is determined exclusively by the underwriters, this IPO used a Dutch auction to price its shares. The process is known as an OpenIPO. IBKR is underwritten by WR Hambrecht + Co. which developed the OpenIPO process.

The Dutch auction process is a little bit complex to explain. Instead, I am copying the following text from the Interactive Brokers' prospectus:

• Bidders may submit bids through the placement agents or participating dealers.
• Potential investors may bid any price for the shares, including a price above or below the projected price range on the cover of this prospectus.
• Once the auction closes, the placement agents will determine the highest price that will sell all of the shares offered. This is the clearing price and is the maximum price at which the shares will be sold. The clearing price, and therefore the actual offering price, could be higher or lower than the projected price range on the cover of this prospectus.
• We may choose to sell shares at the auction-set clearing price or we may choose to sell the shares at a lower offering price, taking into account additional factors.
• Bidders that submit valid bids at or above the offering price will receive, at a minimum, a prorated amount of shares for which they bid.

In an article posted on MarketWatch, I was able to determine that the "clearing price" described above was $33. The IPO managers then made the decision to price IBKR at $30.01 per share. And yes, there is a difference between $30.01 and $30 per share! I've heard from some people who put in bids at $30, but won't be allocated any shares because they are a penny short. Not surprisingly, the $33 clearing price is approximately the price where IBKR started trading.

For me, I put in an order for 800 shares (at $31 and above) through E*TRADE, but was allocated only 400 shares. My broker's policy is to do a random allocation when there aren't enough shares to go around. Thus, I received the "prorated amount" described above. Now I wonder if any individual got allocated more than 500 shares of IBKR in total.

Regarding Dutch auctions, if we remember back to the Google (Nasdaq: GOOG) IPO in August 2004, the "clearing price" was widely believed to be around $100/share. But the IPO managers for Google made the decision to issue the IPO at $85 -- below the clearing price. This was to guarantee a $15/share pop for Google at the open. The IPO itself priced "below range," so I considered it an uninteresting IPO, at the time. In retrospect, I was very wrong about it.

PF Stock

1 comment:

Ann Sherman said...

"the "clearing price" was widely believed to be around $100/share"

As far as I was ever able to tell, Google's clearing price was believed to be around $100 per share simply because the stock closed around that price on the first day. This is circular reasoning that assumes that IPO auctions always price these things at the aftermarket price - a questionable assumption that hasn't held up in practice.

If the clearing price for Google was in fact $100, and yet they were able to price at $85 and still give the average winning bidder about 3/4s of their order, then bidding would have had to have been unbelievably light in that $15 range which, remember, included the revised filing range of $85-$95. The story of a $100 clearing price for Google just doesn't hold up.

We still don't know what the clearing price was for Google, because they kept it secret. It would be nice if all IPO auctions were as transparent as this last one for Interactive Brokers, where they told us the clearing price and the rationing rate. Why can't we see the bid stack for all US IPO auctions, as is required for such auctions in so many other countries?