The New York Stock Exchange on Saturday did a test run of Twitter’s highly anticipated market debut, as it seeks to avoid the types of problems that plagued Facebook’s initial public offering on rival NASDAQ.
The Big Board, run by NYSE Euronext, regularly does systems testing on the weekends, but this was the first time it had run a simulated IPO, and it did so at the request of its member firms—many of whom took part in Facebook’s 2012 IPO on NASDAQ OMX Group’s main exchange.
The NYSE was testing mainly for two things: To see if its systems could handle the amount of message traffic that might be generated by the IPO; and to make sure that once the IPO took place any firms that placed orders would promptly receive the reports telling them that their orders had been executed.
It can also be seen as part of NYSE’s struggle with NASDAQ for supremacy in technology listings. Both exchanges vied to be home to Twitter’s stock, and many analysts said the trading disruptions that occurred on Facebook’s NASDAQ debut likely played to NYSE’s favor, as it tries to become the destination of choice for technology listings, something NASDAQ once dominated.
Twitter, which intends to sell 70 million shares at between $17 and $20 each, will be holding the biggest Internet IPO since Facebook, which sold a much larger 421 million shares at $38 each. Twitter is expected to start trading as early as Nov. 7.
In the case of Facebook, the tremendous volume of orders on the first day of trading exposed a glitch in NASDAQ’s system, ultimately preventing timely order confirmations for many traders, leaving them unsure about their exposure for hours, and in some cases for days afterwards. Major market makers estimated they lost collectively up to $500 million in the IPO.
The absence of NASDAQ CEO Robert Greifeld while the meltdown was occurring magnified the criticism toward the exchange—he had been celebrating the debut at Facebook’s California headquarters before jumping on a plane back to New York.
NASDAQ was fined $10 million by the U.S. Securities and Exchange Commission— the largest fine ever for an exchange—and said it would voluntarily pay up to $62 million to compensate firms that had been harmed. On Friday, NASDAQ said $41.6 million of claims put forward qualified for the compensation plan.
The chaotic debut also contributed to a decline in Facebook’s stock. The stock hit a low of $17.55 in August, though it has since more than recovered the losses, closing on Friday at $51.95, well above its IPO price.
While NASDAQ had tested its systems in the lead-up to the IPO, allowing member firms to place dummy orders to a test symbol over a specific period, it limited the total number of orders that could be received in the simulation to 40,000. On the day of the IPO, over 496,000 orders were placed before the IPO opened, with around 82 million shares traded. By the end of the day, more than 500 million shares had traded hands, a record for an IPO.
NYSE’s tests on Saturday ran hundreds of thousands of orders, with one single firm placing an order at one point for nearly 81 million shares.
“This morning’s systems test was successful, and we’re grateful to all the firms that chose to participate,” an NYSE spokesman said. “We are being very methodical in our planning for Twitter’s IPO, and are working together with the industry to ensure a world-class experience for Twitter, retail investors and all market participants.”
THREE TEST IPOS
On an average trading day, there are around 700 people on the floor of the Big Board dressed in business suits, many also wearing blue jackets with their firms’ names emblazoned on them.
On Saturday, about 20 people— floor operators, technicians, and designated market makers, who are akin to air traffic controllers for stocks, overseeing trading and ensuring fair and orderly markets— gathered in small groups around various screens, dressed in jeans and sipping coffees.
At 7 a.m., just as they would for an actual IPO, over 20 NYSE member firms began sending in their orders for the Twitter IPO simulation. The market opened up as it normally would at 9:30 a.m., but in this case using data from Friday to recreate a normal environment with 3,800 listed stock trading. IPO orders kept coming in and NYSE had a phone line open to keep members apprised of the situation and to answer questions.
Shortly before 10 a.m., the first of three test IPOs to mimic the Twitter debut took place, using the symbol IPOA.
The designated market maker (DMM), in this case a representative from Barclays, ran the auction, with orders coming in electronically on a screen and from brokers on the floor using hand-held computers.
A major difference between NYSE’s system and NASDAQ’s is that NASDAQ’s is fully electronic, while NYSE’s normal IPO procedures include human intervention, through the DMM.
Once a price had been determined, based on the orders that had come in, and following communication with the investment bankers and brokers, the DMM froze the order book and hit a blue “DONE” button on his keyboard. Immediately after, alerts went off on the brokers’ handheld devices indicating their orders had been executed.
A NYSE employee on the floor wearing a Bluetooth earpiece, who was connected to the call with member firms, called out the action as it happened.
The exercise was completed two more times, using test symbols IPOB and IPOC, with KCG Holdings and Goldman Sachs as DMMs, and with saws and drills buzzing in the background from weekend renovations, instead of the usual din of traders.
Both NYSE and NASDAQ have said 2013 is shaping up to be their best IPO year in more than half a decade.
(Reporting by John McCrank; editing by Gunna Dickson)