Case 16: eBay

Everyone knows eBay, Inc. as the world's largest on-line auction based trading system created for individuals. eBay provides a trading place for millions of items on almost everything imaginable. If you want to buy, sell or trade it, chances are eBay knows someone else just like you.

The creation of this new market had been an overwhelming success for this high-flying internet stock until June 10, 1999. On that date, eBay had an unexpected all day outage of their site that resulted in a plummeting stock price and a need for answers. eBay's CEO promptly refunded customers a total of $4 million in user fees and assured traders that the company would take steps to be sure this type of failure would never happen again.

Just before 8:00 A.M. Eastern Standard Time, on August 6, 1999, eBay's Web site crashed again following scheduled maintenance that was supposed to occur overnight. Surprisingly, the news of the crash did not make its way to Wall Street as the stock rose early after the opening bell (The stock market opens at 9:30 A.M.). There was some unrelated profit-taking which ended around 10:30 A.M. This dropped the price back down to around $92 where it remained relatively stable until the Dow Jones NewsWire publicly reported the crash at 12:01 P.M. Immediately, eBay's stock took a nosedive amid high volume selling. By the close of trading at 4:00 P.M., the stock had lost $9.625 per share which represents 10.36%, or nearly $1 billion, in market capitalization. Most of the stock price drop had occurred within the first 15 minutes after the news release.

Questions

1. At 12:01 P.M., when the Dow Jones NewsWire publicly reported the crash of eBay's Web site, the stock price dropped precipitously right away then remained relatively stable (exhibited normal levels of volatility) for the rest of the day. Is this consistent with the notion of efficient markets? Explain.

2. Since eBay's Web site crashed an hour and a half before the stock market opened, why didn't eBay's stock open lower as opposed to higher the way it did?

3. Could people who were aware of the site's crash right before 8 A.M. have made money by taking certain actions in the stock market? If so, what could they have done?