A curious thing happened during Uber’s troubled initial public offering last week: naked short selling of UBER shares by the banks involved in placing Uber’s IPO, according to several sources who confirmed this to CNBC.
Normally, naked short selling is illegal. But it was legal in this case, and it gave the banks a chance to profit–as investors lost money–when the IPO traded down 18% in its first two days (see here, hereand here).
What’s the rub? Naked-shorting of IPOs by banks, which the SEC green-lighted as recently as 2015, has changed IPO market dynamics by altering the relative power between banks, issuers and investors. To the detriment of investors, banks now have less fear of incurring major losses from pricing an IPO too high because banks now have a tool (naked shorting) to protect their downside risk.
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