They say that if at first you don’t succeed, try and try again. In the case of the Virtu Financial (NASDAQ: VIRT) initial public offering, two tries was all it took.
Thursday marked the first time that investors could buy shares and become part-owners of a high-frequency trading company. These are the trading firms using complicated computer-managed algorithms to reap millions in market profits.
High-frequency trading companies were famously portrayed in Michael Lewis’ book “Flash Boys: A Wall Street Revolt” as nefarious money-making machines operated by the stock market elite. In reality, there is a fair amount of truth to the portrayal.
As a result of the book’s expose on high-frequency trading, Virtu scuttled its plans for an IPO when the book came out last year.
Virtu may be ethically controversial, but this certainly didn’t stop investors from snapping up shares on its first day of trading this week.
The IPO priced at $19 per share, which translated to a valuation of $2.6 billion, with $313.5 million in IPO proceeds. The stock finally began trading at $23 per share around 11:30 a.m. Thursday and closed at $22.18, good for a gain of 17% over the IPO price.
One interesting thing about the Virtu IPO is that a majority of the money raised in the offering is going straight back to current investors, including certain Virtu executives and the private equity firm Silver Lake.
If this scheme sounds familiar, it’s because you’ve heard this story before – and recently.
This is another in a recent line of IPOs in which proceeds have mostly gone toward a payday for current investors, rather than directly into use for company operations. The hugely successful GoDaddy (NASDAQ: GDDY) IPO earlier this month was also set up this way. Interestingly, private equity firm Silver Lake is an investor behind both IPOs.
The IPO of Virtu Financial is an interesting situation. On the one hand, Virtu adds a lot of liquidity to the market by placing hundreds of thousands of trades per day. High-frequency trading advocates will argue that this is a huge benefit to the market as a whole and that the high-frequency trading systems make the market more efficient.
Critics will argue that high-frequency traders use computerized trading systems to test the market and front-run human traders, skimming tiny profits from just about everyone in the market and doing it thousands of times over. One certainly has to wonder about the ethics of a computerized trading system that has only lost money on one day in the last 5 1/2 years.
This is an IPO that I have no interest in touching. As I said in my coverage of the GoDaddy IPO, I have little desire to buy an IPO that its early investors are trying to sell out of. They’ve been in it the longest and should know the most about it.
If company insiders and early investors want out of the first IPO of a high-frequency trading company, why would you want to get in?
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