Maybe they will all become trillion-dollar companies. Led by Javier Avalos, a former investment banker who recently spent more than three years with the secondaries platform Forge, Caplight is developing tech to enable institutional investors to take long and short private company positions via synthetic, cash-settled derivatives, so whether or not they own any actual shares in certain startups, they can bet on their rise or fall. More, Avalos and his cofounder, Justin Moore, a former engineering manager at Forge, could also face competition, from their old firm, for example, as well as Carta, the venture-backed company that makes software to manage equity stakes in other startups.
We talked with him late last week to learn more; below are excerpts from that chat, edited lightly for length. What opportunity did you see while working there? The naked short is possible because there is a three-day settlement period for actually handing over the stock. In theory, if the short seller can buy back one share within the three-day settlement period, they can deliver on the stock and close their position.
But naked short selling is still legal for IPO underwriters. The logic is that the underwriters, who created the new shares to begin with, should have no issue failing to deliver since they plan on quickly re-buying the shares in order to prop the stock back up anyway. Although seen as a means to reduce volatility for a brand-new security, stabilizing efforts could also be seen as a legal means of price manipulation that lends itself to ambiguity over how involved underwriters be in propping a stock up.
Jenkinson and Jones also point out that the profits from their short positions are offset by the negative reputational effects of having an underwritten stock fall. Still, naked short selling remains a bit of a mystery in the IPO process because unlike the greenshoe, those positions are not public knowledge. The size of the naked short in the Uber IPO, for example, is unknown. And tracking the trades in the market are difficult because the positions were likely closed very quickly.
As other large companies prepare to go public, underwriters are likely to incorporate at least a greenshoe to make sure their stocks are stable out of the gate. As for the naked short, it will take a little more scrutiny to find out.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter bcheungz. Regulator tells banks to watch out for leveraged loans. Minneapolis Fed's Kashkari: 'Monetary policy has been too tight'. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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