Like you, I've been watching IPOs go off like rockets for nearly two years now, always pondering why some things happen with opening prices. It's time to address the issue.
If you read Friday's
Wall Street Journal
and the tremendous influence it has over the opening of unseasoned IPOs, you got some valuable insight. And it brought to mind my own experience with
IPO last May.
So, what did happen that day when TheStreet.com went public? What was that strange opening in the 60s all about? How did an opening that made no sense to anyone at the company or to the professional market-makers at
happen? How did something so gross and wrong occur that day?
I never wanted to tell the story because frankly, I didn't think anybody would believe me. I didn't want to believe it myself because it seemed impossible.
If you didn't read Friday's
piece, go back to it now.
To recap, the story postulates that many of the crazy things in this market come about because Knight/Trimark batches most of the orders from the online brokers. Knight/Trimark is a market-maker that fills orders from discount brokers' customers. The article speculates that Knight/Trimark, while trying to do its best for its clients, also has an order book advantage. It can go short or long and be more profitable than other houses on the Street because it has a deeper order book. In my parlance, it knows where the bodies are buried. It knows who is alive at certain levels and wants to sell or buy. This informational advantage can be like coining money in these difficult markets.
What does that have to do with TheStreet.com? I knew that if our stock opened up too high, my reputation would be in tatters, even though I wasn't selling a share. I was "locked up," so my holding of the shares was not because I was some sort of an angel. I couldn't do it anyway.
While I was proud of what we had built, I also knew that at $60 many of the institutions we had courted to become shareholders would bolt. The incentive to take the "free money" of a $19 pricing was just too great. I didn't blame them. Even if I were a believer, I would do it.
I remember Eric Gustafson from
"Squawk Box" co-host and an email collaborator) saying something to the
to the effect that he would flip the stock if it opened too high. That hurt, because we needed good guys like Eric to stay long.
The morning of the deal I spent, like every day, at my turret. I remember my father, who was with us, being very excited but confused. He watched helplessly as his son grew increasingly apoplectic at the possibility that the stock would open "too high."
Dad knew only that first-day pops were the goal. Not me. The higher it went the more likely people would be disappointed in us.
He watched as I grew desperate trying to figure out what was taking so long and why the stock wasn't going to open up in the high 20s or low 30s, which would have been just fine. It would have been not so outrageous but high enough that it wouldn't tick right back to the offering price.
I had my traders check with desks to see what they were thinking and hearing. They were still waiting, they said, for the order book to fill in. They were still waiting, they said, to see what Knight/Trimark was going to do.
I was incredulous. "Who cares about Knight/Trimark?" I said to our traders. I cared about Goldman Sachs. They were our underwriter. What did it matter what Knight/Trimark had to do? They didn't do the underwriting.
But, I was told, we were a real "retail" story, and that the online people who wanted us all ended up going through the Knight/Trimark funnel. I wanted to know why the old-fashioned houses couldn't meet the demand at lower levels so that it wouldn't spike so badly.
I was told that was not the way it worked. Only Knight/Trimark knew what price it was going to pay. It seemed everybody else was too fearful or clueless to get involved. This had me really steamed because one of the things you pay underwriters for is help on this first day.
Right before we were about to open in the mid-40s, Steve Frank at
did a sensational piece about how much money I was going to be worth if the stock opened up high. I remember thinking how that guy must love making feel people crummy because everybody knows that you don't like it when you hear yourself talked about like that. But all the story did was bring in
Finally late in the morning I was told that Knight/Trimark played its hand. It supposedly had multiple six-figure buyers willing to pay in the 60s. Oh my. I knew this was a true disaster waiting to happen. Every good account would flip.
Our retail buyers, including many of our readers, would be completely pimped in the 60s, and my reputation as a scummer would be sealed.
So it seems a giant batched order by Knight/Trimark blew our opening. It seemed too outlandish for me to believe. Until I read in the
that it happens all of the time. Glad I found out, better late then never, how our stock got disconnected so fast from our company.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman Sachs and TheStreet.com, and Cramer was long TheStreet.com. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at