I thought it would be helpful to outline the mechanics of how the New York Stock Exchange trades initial public offerings, and the benefits for issuers and investors.
- Before the stock opens, we publish indications of the expected price range based on incoming orders, as well as the amount of shares that are matched at a price or “paired off,” and the amount left over to buy or sell, also called the imbalance. Indications continue as the price range narrows, right up until the stock opens. In other words, there is a great deal of transparency, giving buyers and sellers visibility into what’s happening as well as the opportunity to react by changing or canceling orders or sending new orders.
- We work to have the stock open as close to the opening bell as possible, but the timing is less important than getting the price right – that is, a price at which the stock can trade in an orderly manner after the first trade.
- To determine the price, we run an auction that aggregate orders from on and off the trading floor into a centralized, open, single-price auction. We include interest from our unique market participants: Designated Market Makers, who have accountability for maintaining a fair and orderly market; Supplemental Liquidity Providers, adding their interest electronically from off the floor; and Floor Brokers, who are agents representing the interest of customers. Even the lead broker from the underwriting firm is physically present, so we can ensure that all of the underwriters’ interest is represented before the stock opens. All of this contributes to highly robust price discovery, reflecting all interest in the aggregated first trade.
- We commit significant technology resources and planning for special events such as IPOs. This includes giving major IPOs their own server and order book, and keeping customers informed as the indication process progresses and trading gets underway.
This process has served our issuers, their investors and the trading community very well, including large, high-profile transactions. Of the 20 largest IPOs listed in the U.S. history, 19 have chosen to list on the NYSE. To cite a couple of examples:
- General Motors, 18 November 2010. Following GM’s $20 billion rebirth as a public company, more than 37.6 million shares trade at $35.00 a share at the NYSE open. The trading range in the first half hour was 3.79 percent.
- Visa, 19 March 2008. The size of the opening trade in the company’s newly public stock was 32.9 million shares. This was the largest U.S. IPO ever, raising $17.86 billion.
- The model is well suited for deals of all size, demand and visibility, and performed well on such notable tech deals: Freescale, Renren, Fusion-io, Demand Media, LinkedIn and Pandora.
As my colleagues and I have mentioned previously on the blog, our IPO pipeline is strong and we welcome opportunities to engage on the capital formation process and work as an advocate to promote this engine of economic growth.