Facebook IPO launch problematic

Facebook's initial public offering on Friday was problematic as the NASDAQ was plagued by technical difficulties. The IPO was priced at $38.00 and trading was set to begin at 11:00 A.M. In our office we were fixated to the TV as the countdown got closer and closer to 11:00AM. By 11:05 it was apparent to us that something had gone wrong.

Now, if you're trading FX you need to realize that movement in the equity and debt markets has a direct effect on the foreign exchange market. Without getting into anything complicated, I'll make two points. First, the S&P 500 has exhibited a strong correlation to high yielding currencies such as the Aussie and Kiwi. Second, before the launch, the majority of market participants were expecting the stock to do fairly well. Expectations are important to understand because if those expectations are not met, the effect is a more volatile reaction then it would have been if price had moved in the expected direction.

Trading of Facebook stock started about half an hour late and it immediately started tanking as the technical difficulties caused the heads of major trading desks to back away. The problem was attributed to an unprecedented amount of orders. The S&P 500, which had been positive on the day, started dropping. That had a direct effect on AUD/USD and caused that to start dropping as well. The AUD/USD 11:00 A.M. candle went from .98695 to .98086, a 60 pip move. I put on a short around 10:30, but closed it out with a couple of pips in profit after seeing the initial FB trading price projected at $45. I was playing a move off of the long wicks and candlestick formation; but didn't feel comfortable holding it for several reasons. First, there were some larger players who didn't want to hold their short positions over the weekend so they were taking profit on them. Second, since I got in the office and started looking at the markets, I judged the Euro and Aussie to be in a "risk off off" corrective move. 

All and all, it was a very interesting day. Morgan Stanley had underwritten 38% of the FB IPO and vigorously defended the $38.00 mark. Later on in the day I watched from 3:45 to 3:55 as FB's price fluctuated back and forth from $38.00 and $38.01. If you're an underwriter, letting the IPO fall under the price you valued it at (on the first day) is bad for business. I can only imagine some of the underwriters made a beeline for the nearest bar after they got out of work on Friday.

My Advice: On Monday if FB stock rises and the equity markets get the bounce that they've been waiting for, we could see some dollar weakness. If we do see weakness, I favor playing it against EUR/USD or GBP/USD.

Michael Weissman



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