Facebook’s IPO: Morgan Stanley’s Conflict of Interest

Morgan Stanley’s underwriting of Facebook’s IPO has been thought by some of the bank’s rivals to be incompetently managed.  According to the New York Times, “(r)ival bankers and big investors have complained that Morgan Stanley botched the I.P.O., setting the price too high and selling too many shares to the public.”[1] Interestingly, the incompetence is positively correlated with unethical policy decisions at the bank. Even as the bankers as underwriters were eager to sell lots of shares, they may have given some of their institutional customers—albeit only the most preferred, as per the bank’s other services—some privileged information. If this charge is true, the conflict of interest at the bank should be closely examined by Congress and any relevant regulators.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. Evelyn Rusli and Michael De La Merced, “Facebook I.P.O. Raises Regulatory Concerns,” The New York Times, May 22, 2012.

Efficiency and Ethics: On the Fairness of High-Speed Trading

Two months into 2012, the SEC announced that it had been examining the trading activities of high-frequency trading firms.  According to the Wall Street Journal, the SEC was “examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets. . . . High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders.” High-frequency traders “can access prices a split second faster through their access to direct feeds.” This is accomplished by placing the trading computers in the same data center that houses the exchange’s computer servers. Just over a year later, the Wall Street Journal reported that high-speed traders were using “a hidden facet” of the Chicago Mercantile Exchange’s computer system “to trade on the direction of the futures market before other investors get the same information.” Even getting the confirmation of a high-speed trade just one to ten milliseconds faster can enable a computer to know the direction a commodity is going and trade on it. According to the Wall Street Journal, the “ability to exploit such small time-gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.” Both the increasing use of high-speed trading and the problem of accountability from a regulatory point of view raise the stakes in determining the ethics of the practice. 

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.