* Brokerage execs fear backlash from retail investors
* Low trading volume, high cash balances seen continuing
* Confidence in securities industry takes another hit
By Jed Horowitz and Olivia Oran
NEW YORK, May 25 Just when brokers thought
Mom-and-Pop investors were getting excited about the stock
market, along came Facebook.
The 17 percent plunge in Facebook's shares since its
ballyhooed debut last Friday, coupled with Nasdaq's mishandling
of opening day trading, is spooking the very investors who had
seemed the most intrigued by the offering, said Wall Street
"The Facebook IPO is another in a series of data points that
feed concerns that the financial markets are not a safe place to
be for individual investors," said John Taft, chief executive of
Royal Bank of Canada's U.S. wealth management division,
one of 33 underwriters of the offering.
Brokerage firms have been fighting to restore investor
confidence in the markets since the financial crisis of 2008,
but trading volume has remained stubbornly weak.
Market-shattering events such as the Flash Crash of 2010, the
Bernard Madoff scam, last summer's downgrade of U.S. government
debt and the European sovereign debt crisis have been pushing
investors out of equities into cash or bonds that yield
Anticipation of the Facebook IPO had created a stir of
public interest in the offering and in stocks in general. Now,
its failure is expected to drive more retail investors away from
stocks and further depress trading volume, which lowers revenue
at brokerage firms.
"YOU OWE ME"
Investors poured $33.5 billion of net new money into U.S.
stock mutual funds in the first quarter, according to Thomson
Reuters Lipper. In the last three weeks, however, they pulled
out $16.3 billion.
"The Facebook flop didn't help," said Jeff Tjornehoj,
Lipper's head of Americas research.
"The perception was that something good was going on," said
Anthony DeChellis, chief executive of private banking Americas
at Credit Suisse, which also had a small portion of the Facebook
underwriting. "It could have gotten people interested in the
next IPO, but the conversation now is, 'You owe me because of
The Facebook IPO had plenty of problems. The company
increased the size and price of the issue just before the debut,
and it later emerged that numerous analysts had cut their growth
forecasts for the company -- without telling retail investors.
One result was that despite pre-IPO chatter about a scarcity
of shares, too many retail investors got a piece of the Facebook
action, brokers said. Trading in the IPO last Friday made up 40
percent of daily volume at discount brokerages, up from 2
percent to 5 percent historically for IPOs, according to
analysts at Sandler O'Neill & Partners. So-called retail
investors lost an estimated $630 million in the first four days
EVEN INSIDERS GOT PUMMELED
New headlines showing that even Wall Street insiders got
pummeled by the Facebook debut have stoked further doubts among
small investors. At least four of the trading firms chosen by
Nasdaq to make markets in Facebook lost a total of more
than $100 million because of systems issues in the electronic
marketplace, according to one of the firms.
"It's disheartening and very scary," said Victoria Phibbs, a
day trader from Jacksonville, Florida, who canceled an order for
400 Facebook shares through her Charles Schwab Corp
brokerage account as she watched the price plummet on its
opening day of trading. She learned in the evening that her
order was nevertheless filled, leading to a $1,000 loss as she
sold the shares. Schwab, she said, reimbursed her commission
"It's not like when our parents used to trade," she said,
recalling a time when investors could be confident enough in the
markets to buy and hold stocks for the long term. "I feel like
you can't win as an individual investor."
Spokespersons at Nasdaq did not respond to calls for
comment. A Schwab spokesman said the company has resolved most
of its clients' Facebook-related issues.
Brian Cabral, a United Airlines pilot from Topsfield,
Massachusetts, ordered 100 Facebook shares through a discount
broker last Friday during a layover on a flight from Tokyo to
Washington, then quickly canceled the order. He received a
"cancel pending" notice within minutes. But more than six hours
elapsed before he received word that the cancellation went
through, a notification he said typically takes five to 10
"I think these types of shenanigans will dissuade people
from investing in the stock market," said the 50-year-old pilot.
"You're not going to see my generation really coming back to
NASDAQ GLITCHES ADD FEAR
RBC's Taft said the Facebook systems glitches are
particularly harmful to restoring confidence. "You can imagine
the feedback we're getting from brokers and clients," he said.
"You should be able to trust that your buy and sell orders are
being filled in a timely manner."
The securities industry is concerned that the extended
drought in stock investing will continue to erode its bottom
line. Trading commissions at retail brokerage firms dipped 9
percent in this year's first quarter from a year earlier while
cash balances and investments in low-yielding bonds are at
unusually high levels. "Credits" reflecting cash at securities
firms have grown 32 percent in the 24 months ended Feb. 28,
according to regulatory reports.
Balances in margin accounts - a profitable lending product
for brokers and an indication of investors' risk appetites - are
10 percent below last April, according to analysts at Goldman
The hit to brokerage firms' bottom lines from reduced
trading has been cushioned by the growth of fee-based advisory
accounts and the recovery of the broad market from the depths of
the financial crisis, but brokerage executives said distrust of
the markets and trading remains a problem.
"Investors are still spooked," said Taft, a former chairman
of the Securities Industry and Financial Markets Association,
the U.S. brokerage industry's principal trade group.
That Facebook blew up after weeks of anticipatory headlines
is proving to be an object lesson to retail investors.
"There is an incredible amount of empirical evidence that
retail investors should not be buying IPOs," said Henry Hu, a
securities and finance professor at the University of Texas Law
School. "Insiders always know more and the pricing is incredibly
The apparent mispricing of Facebook shares by underwriters
and the deal's large float give the impression that Wall Street
enjoys "squeezing every dime out of investors' pockets," likely
hurts Facebook's ability to sell future offerings and exposes
the company and its underwriters to litigation, he said.
IPOs are subject to Section 11 of the Securities Act of
1933, which sets higher standards of due diligence than other
antifraud provisions of the securities law. "Section 11 is
promised land for plaintiffs' attorneys," said Hu, who was the
first head of the Securities and Exchange Commission's division
of risk, strategy and financial innovation.
SEC Chairman Mary Schapiro told reporters Tuesday that there
is still "a lot of reason to have confidence in our markets and
in the integrity of how they operate," but one of her
predecessors was less cheery.
"It's an event with long-lasting negative implications for
an industry that can ill afford this kind of blemish," former
SEC Chairman Arthur Levitt said in an interview.