By Matt Jarzemsky and Drew Fitzgerald
Facebook Inc. (FB) shares jumped as much as 11% Wednesday as
about 804 million shares held by early investors became eligible
for trading.
The sharp gain in stock price goes against conventional
thinking, which suggests an increase in the supply of shares should
ease demand and ultimately reduce the share price. Of course, few
things regarding Facebook's short six-month history as a public
company has gone as expected or without confusion.
Among the reasons cited for the stock increase Wednesday were
pent-up demand for Facebook stock and a "squeeze" on those betting
that Facebook shares would fall following the lock-up
expiration.
"If you have people betting on a big downturn, and it doesn't
materialize, the next move is up," said Steve Sosnick, equity risk
manager at Timber Hill, the market-making unit of Interactive
Brokers Group Inc. He added that investors unwinding bearish bets
on the stock might be contributing to the rally.
Short sellers borrow shares and sell them, hoping to buy
lower-priced shares after they decline in price and return those to
the lender, pocketing the difference. But short sellers are on the
hook for losses if the stock rises instead. Certain options bets
also can lose speculators money if a stock rises.
"It's such a day-trader type of name, you get a little rally and
it jumps off," Mr. Sosnick added.
Facebook shares recently rose 9.8% to $21.81. The stock hit a
high of $22.09, its first move above $22 this month. Of course,
shares remain well-below the stock's initial price of $38 on May
18.
Facebook shares saw heavy trading volume, although the pace had
slowed significantly from the session's first half-hour. As of
early Wednesday afternoon, 148 million shares had traded hands,
which already makes it the fifth busiest trading day for Facebook
stock.
The volume Wednesday is nearly three times Facebook's average
over the past 30 days, according to FactSet. By comparison, Bank of
America Corp. (BAC), the most heavily traded stock in the Standard
& Poor's 500-stock index, had seen just 111.8 million
trades.
Pent-up demand for the stock was cited as a possible catalyst
Wednesday. "There was a lot of money that was waiting on the
sidelines until today," Pivotal Research's Brian Wieser said. Some
investors may have been waiting to buy Facebook stock, expecting
cheaper prices Wednesday because certain early investors would
finally be able to sell their stock.
A shift in investor sentiment regarding Facebook may be adding
support, too. "In the past, we didn't have the fundamental support"
the stock enjoyed in recent weeks, Sterne, Agee & Leach analyst
Arvind Bhatia said.
Following a five-month slide, Facebook shares have held up
better over the past month after the company's third-quarter
earnings showed its business had become more profitable on mobile
devices, a sign Mr. Bhatia said shows management is "on top" of its
users' growing use of smartphones.
Also possibly contributing to the gains Wednesday was a market
rumor, according to traders, that there was a delay in delivering
some of the 804 million shares to investors, potentially tightening
supply. A Facebook spokeswoman declined to comment, saying the
company doesn't respond to market rumors.
Options traders, meanwhile, have been betting that the worst has
passed in terms of pressure on the stock from lockup expirations,
or the lifting of rules that bar early investors from selling
certain shares into the market.
"The lockups have been talked about so much, for months and
months," said Brian Overby, senior options analyst at online
brokerage TradeKing. "Just because the stock is being unlocked
doesn't mean everyone is going to sell."
Those who bet the lockup expiration wouldn't be so bad for the
stock are looking pretty good. Monday's actively traded November
$20 and $21 call options, which were bought at an average cost of
30 cents and 17 cents/share, respectively, could now be sold for
about $1.75 and 90 cents, a profit of more than 400%.
--Kaitlyn Kiernan contributed to this report.
Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com or
Drew FitzGerald at andrew.fitzgerald@dowjones.com
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