Scared of Facebook shares? Wager on Friday's close
Worried that if you buy Facebook when it starts trading Friday you'll get trampled by big banks and hedge funds? Betting on where the stock closes that day may be a safer wager.india Updated: May 16, 2012 19:00 IST
Worried that if you buy Facebook when it starts trading Friday you'll get trampled by big banks and hedge funds? Betting on where the stock closes that day may be a safer wager.
Intrade, the online prediction market where investors can bet on numerous events, from movie box office receipts to the U.S. presidential election, started a contract Tuesday for bets on where shares of Facebook will close on Friday, their first day of trading.
Dublin, Ireland-based Intrade has contracts for myriad events, some stranger than others. Investors can bet on whether NASA will announce the discovery of extraterrestrial life - with varying expiration dates - or how long Bashar al Assad will remain president of Syria.
For Facebook, Intrade is offering contracts that bet on the stock closing anywhere from $25 to $60, at $5 intervals.
The hotly anticipated initial public offering has sparked intense interest from investors big and small. Facebook has raised the expected price range for its shares to $34 to $38, and many expect the shares to make a big move in that first day.
That could be perilous for individuals. If the stock explodes on Friday, the average person might end up buying shares at a price much higher than he wanted as funds steamroll in and then zip back out.
"I am telling people to use a limit order (good for one day) at $55 and not to be upset if they don't get hit," said Joshua Brown, financial advisor at New York-based Fusion Analytics. "Market orders on IPO day are never a good idea."
A market order does not specify the price an investor wants to buy a share, where a limit order does. Demand is expected to be enormous, which could buoy the price throughout the session and into next week, however.
The trading in Facebook expectations on Intrade has so far been minimal given the contracts are just several hours old. So far, one contract has three trades, another two, but with enough trading, Facebook's experience could mirror what happened in prediction markets when Google Inc went public in 2004.
"Past history suggests some useful information in these markets," said Eric Zitzewitz, associate professor of economics at Dartmouth College in Hanover, New Hampshire.
Google, which priced at $85 a share, closed its first day of trading at $100.34, for a market cap of about $27.2 billion. The stock was up 1.2 percent at $610.35 on Nasdaq late Tuesday afternoon.
The Iowa Electronic Markets (IEM), which are so far not trading a Facebook contract, ran two separate contracts in 2004 ahead of the IPO. Those contracts resulted in relatively accurate estimates of a first-day value of $26.7 billion and $28.2 billion just before the IPO pricing, according to a 2005 paper by professors at the University of Iowa, which operates the IEM.
Trading also occurred on TradeSports, a sports-betting site that was a sister site to Intrade, which later closed down.
The IEM is not running a Facebook market due to "limited resources," said Tom Snee, a spokesman for IEM.
What will be important, Zitzewitz said, is the bid-ask spread in the contracts in question. Smaller spreads suggest less guesswork in the betting.
"Give this a couple of days, and see if you start to get some orders before you take it too seriously," he said.
Intrade's most popular contracts revolve around the 2012 U.S. presidential election. More than 241,000 shares have traded in President Barack Obama's contract, nearly 200,000 in Republican nominee Mitt Romney's contract, and more than 200,000 for Ron Paul's contract.
Intrade could not be reached for comment.