U.S. housing IPO stalls, auction process abandoned

The initial public offering of the financial instrument for betting on U.S. home prices has failed because its auction could not generate a balance of investor interest in the product's two linked trusts, according to a filing with the U.S. Securities and Exchange Commission.

MacroMarkets, which could not be reached for comment regarding how or when it might launch the product, stated in its SEC filing that it ultimately rejected all of the auction's bids because there was an insufficient demand for an equal number of Down and Up shares.

That meant the company had to abandon the auction process because the product can function only if there are an equal number of shares in both the up and the down trust and if each pair of shares adds up to $50.

If the benchmark index falls, for example, a portion of the up shares' value moves into the down trust and the shares' prices adjust accordingly.

The company had already extended the auction in an effort to attract more and bigger institutional investors and had postponed the start of trading, scheduled for May 11.

MacroMarkets had originally set a minimum closing investment pool of $125 million. Chief Executive Sam Masucci declined to disclose the value of the bids received before the company decided to extend the auction.

Interest from institutional investors was greater than the original minimum, Masucci had said, but the institutions needed more time to understand the product and generate internal support for it.

MacroMarkets solicited investment from such parties as homebuilders or banks who want to hedge their housing exposure and foreigners who want to play in U.S. real estate.

Investors might have struggled to value the shares because doing so requires not only predicting the movement of the underlying 10-city index but also gauging the relationship between the index and home prices, said Dave Johnson, a trader based in Watertown, Connecticut, who focuses on exchange-traded funds, futures and commodities.

There are other ways to get exposure to housing weakness, Johnson said. You can play that with the homebuilders, or materials producers.

Johnson admires the theory behind the product but thinks it might not generate enough volume for him to trade in it.

This could be a great tool if you could educate people on how it would work, he said. There's a fear of getting involved in something new.

Robert Shiller, the Yale professor of economics who with Karl Case devised the widely watched housing index to which the product is pegged, has encountered this kind of caution on the part of investors already.

A futures market weighted to the 10-city index trades on the Chicago Mercantile Exchange, but thinly, said Shiller, who is also a co-founder of MacroMarkets.