the bank gets paid its full IPO commission on the extra shares it sells if exercises its option, so it has an incentive to sell them regardless of how much excess demand there is. And there's no risk to the bank if the stock price jumps, because the bank can cover its short buy buying the stock back at the IPO price.
And if the stock drops after the IPO? Well, then the bank really cashes in. Because then the bank makes money from (1) IPO commissions (2) Proceeds from shorting the stock at the IPO price and then buying it back at a lower price.
There are so many inherent flaws with the commission + fee incentive structure. We see this structure most often manipulated by the Agent + Broker model (applies to both Wall St brokers and real estate brokers).
(1) For an Agent, reward is decoupled from risk;
(2) For a Brokerage, risk is decreased by controlling as large a part of the "market" as possible, which usually equates to controlling as many Agents as possible;
(3) There's more "potential reward" for gambling with other people's money than there is fallout from that risk. Brokers encourage Agents to take risks that reward "The Brokerage" and yields Agents kickbacks; Agents encourage clients to take risks that potentially reward clients, but guarantee reward for Agents, who are then potentially rewarded by their Brokerage. The catch is that Agents require clients to be contractually bound to Brokerage (thus the Brokerage acquires more control over the market). Agents are glad to do this, in return for guarantee of being "proportionately" rewarded.
(4) The "fallout" from risky behavior is disproportionately distributed, and almost always falls on the client. Fees put the client at an immediate "loss" in an investment, which encourages aggressive risk to recover the loss (the higher the fees, the higher the risk)
(5) Brokerages profit from "unstable" markets, where turnover generates fees.
(6) Agents profit from commissions (usually percent commission), which are generated by turnover.
(7) Clients can only profit when their return reaches a number > [Broker Fee] + [Agent Commission]. Due to information asymmetry, it's very difficult for a client to know when this is.
And if the stock drops after the IPO? Well, then the bank really cashes in. Because then the bank makes money from (1) IPO commissions (2) Proceeds from shorting the stock at the IPO price and then buying it back at a lower price.
There are so many inherent flaws with the commission + fee incentive structure. We see this structure most often manipulated by the Agent + Broker model (applies to both Wall St brokers and real estate brokers).
(1) For an Agent, reward is decoupled from risk;
(2) For a Brokerage, risk is decreased by controlling as large a part of the "market" as possible, which usually equates to controlling as many Agents as possible;
(3) There's more "potential reward" for gambling with other people's money than there is fallout from that risk. Brokers encourage Agents to take risks that reward "The Brokerage" and yields Agents kickbacks; Agents encourage clients to take risks that potentially reward clients, but guarantee reward for Agents, who are then potentially rewarded by their Brokerage. The catch is that Agents require clients to be contractually bound to Brokerage (thus the Brokerage acquires more control over the market). Agents are glad to do this, in return for guarantee of being "proportionately" rewarded.
(4) The "fallout" from risky behavior is disproportionately distributed, and almost always falls on the client. Fees put the client at an immediate "loss" in an investment, which encourages aggressive risk to recover the loss (the higher the fees, the higher the risk)
(5) Brokerages profit from "unstable" markets, where turnover generates fees.
(6) Agents profit from commissions (usually percent commission), which are generated by turnover.
(7) Clients can only profit when their return reaches a number > [Broker Fee] + [Agent Commission]. Due to information asymmetry, it's very difficult for a client to know when this is.