I.P.Ow! The Facebook IPO

When it comes to disastrous trades, it doesn't get much worse than my Facebook IPO trade of 2012. In this excerpt taken from Cash Rules: Reminiscences of a Day Trader, I share the gruesome details of this trade that still stings after ten-plus years.

The story begins with me in a prolonged trading slump, making an emergency escape with young family from London, and its astronomical living costs. With my trading career and my bank account running on fumes, we set off on a road trip to Poland. Upon our not-so-grand arrival, we moved into my mother-in-law's communist-styled apartment in the rural fields of Poland. It was quite a shocking turn of events, considering I was accustomed to the "good life" of a successful trader.....

"Pretty soon after we got to Poland, I received news that finally offered some hope, suggesting the trading gods might be ready to show me some mercy. Back then, one of the few remaining strategies that seemed to provide any edge revolved around initial public offerings (IPOs). The basic idea of the strategy was to buy the opening trade on the day a company became public (or had their IPO) and then sell immediately in the ensuing euphoria, or “pump”. Typically, the more hype around the IPO, the better the results. There wasn’t any company in the world at this time that was more hyped than Facebook and–after years of rumors and anticipation–in the spring of 2012, Facebook finally announced its IPO. The buzz was deafening.

Even though the actual trade would only last seconds or minutes, I knew that I had to fly halfway around the world and to the safe confines of the Austin office. Although we were almost broke, I was certain that this one trade was the answer to all our problems, so I considered it a shrewd investment. I needed fast and reliable internet, a proper trading setup, and, most importantly, to surround myself with elite traders who would help me get the most from the opportunity.

Arriving in Austin, it felt reassuring that the whole office shared high expectations for this IPO. We all agreed that this was the time for aggression, and despite my fragile confidence, it felt like the only option was to go all in, risking all of the meager balance left in my trading account; it was kill or be killed. I was excited, but there was nervousness, anxiety, and dread at what it would mean for my small family if it went wrong. I didn’t have a backup plan.

The day of the IPO started with an ominous sign. We discovered that one of our friends had received an allocation of shares of Facebook at the offering (wholesale) price. A surprising turn of events, since only those well-connected, such as privileged hedge funds, typically receive shares of an IPO at the offering price. The fact that a friend with a small brokerage account received shares meant there wasn't the demand for these shares we expected. I knew all too well that when the small guys get handed anything from the big boys in this business, it typically means they are about to get screwed. I and the rest of the office chose to ignore this warning sign and proceeded with our plans, waiting nervously for the opening trade of Facebook on the Nasdaq exchange.

I had placed orders using every last dollar of my available capital, planning to buy the opening trade and then quickly sell on the inevitable initial surge. After an excruciating wait, it finally began trading, and our stomachs collectively sank. Upon opening, it did have a quick pump to the upside, but, within seconds, it was trading under the price of the opening trade.

This was a trade which we had all bought, or at least we thought we had all bought…But our shares hadn’t appeared in our accounts! A technical problem had hit the exchange, and we had no idea if our orders had been filled or, by the grace of God, been canceled. We sat in a state of shock as the stock continued plummeting. Our office managers frantically worked the phones to no avail, leaving us in the dark for hours. With my fate hanging in the air, I paced the office and braced myself for what I assumed would be more bad news.

Finally, what we all dreaded came to pass when our Facebook shares appeared in our trading blotters. It only took a quick glance at my P&L to realize my trading account was demolished. It felt like a punch to the gut.

Facebook caused widespread destruction throughout the office. John and Mike played it even more aggressively than I, cleaning out larger accounts. John even received the honor of being interviewed by the Wall Street Journal regarding the debacle, but John’s sudden stardom did little to ease our pain, we were all helpless innocent victims."