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There are rising fears on Wall Street that retail investors will only retreat further from being active participants in the world’s biggest stock market after the disappointing debut of Facebook shares.
With 900m users, the social networking site’s interaction with Wall Street garnered a vast audience for what was seen as one of the hottest new share listings in history.
Now those hopes have turned to dust after Facebook’s poor after-market performance. In addition, retail investors have been left with a bitter taste amid charges that they were not privy to revenue downgrades days before the float, and a perception that Facebook’s early backers and its banking syndicate were greedy.
“A lot of people not connected with finance use the site and were aware that the company was listing,” said a fund manager. “Even my teenage daughter wanted to buy the stock at the IPO, but not now after it has dropped to $32.”
The shares floated at $38. But they slid as low as $30.94 last week and were trading at $31.80 on Friday, well below their post-IPO high of $45 a share.
The sale of 421m shares in Facebook targeted many retail investors and the bullish expectations around its IPO were expected to bolster the broad stock market, which has been under pressure in recent weeks from eurozone contagion worries.
“Facebook’s insistence that a large portion of its float should go to retail investors was well intentioned, but it simply didn’t work well,” said Oliver Pursche, a portfolio manager at Gary Goldberg Financial Services. He is not planning to buy the shares, despite being a regular investor in technology-related stocks.
Facebook’s disappointing debut also hurts efforts by Wall Street to woo retail investors back to shares, after the flash crash of May 2010 triggered a massive flight out of equities as people were less inclined to trust the inner workings of the industry.
“Facebook brought hundreds of millions of shares to the stock market and it could have also brought back a large number of retail investors,” said Kenneth Polcari, managing director at ICAP NYSE.
The social network’s IPO has also prompted criticism about technology issues at Nasdaq and raised questions about the role of Facebook’s executives and underwriting banks, led by Morgan Stanley.
“Retail investors need assurance that it’s a fair game and that the market will treat their trades properly and they are not at a huge disadvantage to the big guy,” said James Angel, associate professor at Georgetown University’s McDonough School of Business.
“The reaction among retail investors is that this is a sharpshooter’s market and they are not that, so it’s best to stay home and not trade,” he added.
Since 2009, when stocks reached their post-financial crisis low, investors have pulled $214bn out from US equity mutual funds, according to data by EPFR, which tracks global funds flows. That trend accelerated after the flash crash in May 2010.
“Retail investors are quite upset and annoyed,” said Mr Polcari at ICAP NYSE. “They have lived through a lot in these past four or five years and got slammed during the financial crisis.”
Two years after the flash crash and despite efforts by exchanges and regulators to improve the resilience of technology and trading shares, the problems over Facebook’s listing suggest retail investors will remain wary of Wall Street.
“This is all very damaging because we may be driving a generation of smaller, younger and individual investors out of markets,” said Mr Pursche at Gary Goldberg Financial Services. “This fiasco just increased their perception that the system is stacked against them. So, why would they bother?”