MUSTread: Fact-based story on potential analyst/underwriting irregularities during Facebook IPO

Nice layman's explanation of price/earning ratio, using Facebook as example

Allegation Morgan Stanley withheld information from the public

"For a few minutes, the most-watched stock in the world behaved like a malfunctioning computer program. The stock that convinced untold thousands of regular people with E-Trade accounts to get back into investing behaved according to rules that literally none of them understood, traded at volumes that none of them could conceive of and effectively followed contradictory orders from two sets of screaming robots. This is what future shock feels like.
Next time your dad asks you if he should invest in a hot tech IPO (because "you know all about this kind of stuff"), show him that video. Ask him how he'd feel to see his purchase flying down that ledger. Confident? Smart? Tiny and stupid? Then tell him, for god's sake, to find a new hobby."

HFT stands for High Frequency Trading. That's when computers take over the buying and selling of a stock. They are doing that with a speed that doesn't allow human traders to compete. Facebook's IPO was highly effected by it.

"Between 11:49 and 11:54, something extraordinary happened. For about 300 seconds, the computers took over. The stock, which had dropped four points in the five minutes prior, froze in an incredibly narrow five-cent range while two sets of computers put in thousands upon thousands of bids against one another. On one side, the underwriters' computers were offering to buy hundreds of millions of dollars worth of stock to keep it from dipping below the crucial $38 level; on the other, high frequency traders were making veerrryyy slightly higher bids at just above $38 — $38.01, $38.02 — which they would sell, literally seconds later. … For a few minutes, the most-watched stock in the world behaved like a malfunctioning computer program. The stock that convinced untold thousands of regular people with E-Trade accounts to get back into investing behaved according to rules that literally none of them understood, traded at volumes that none of them could conceive of and effectively followed contradictory orders from two sets of screaming robots. This is what future shock feels like." via Chris (Twitter)

First, it’s worth explaining how the greenshoe option is meant to work. In the IPO, the underwriting banks — there were lots of them, but let’s just call them all “Morgan Stanley”, for simplicity’s sake — sold 484 million shares of Facebook at $38 each. At the same time, they bought 421 million shares of Facebook from the company and its investors, at $37.582 each. The underwriter’s fee of 1.1% is the difference between those two numbers: if you buy at $37.582 and sell at $38, then you end up creaming off 1.1% of the total amount raised.

You’ll note that Morgan Stanley sold more shares than it bought. That’s the greenshoe. When you sell more shares than you buy, you’re short that stock, so when a bank exercises its greenshoe option, as Morgan Stanley did in this case, it is going short the stock in question.

Why would a company like Facebook want its banks to be short its own stock? Partly because when there’s a big short in the market, that provides upward pressure on the share price. Shorts need to cover their short position — which means they need to buy stock. But more generally, the greenshoe is a way to provide the market with a nice extra slug of shares, which everybody wants if the stock trades substantially higher than its IPO price.

Details on what went wrong with Facebook's IPO