Going public: How Twitter's IPO will work

By KEN SWEET, AP Markets Writer Modified: November 5, 2013 at 7:42 pm •  Published: November 6, 2013
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— Around 9:15 a.m., fifteen minutes before the market opens, traders get a first taste of the public demand for a company's shares. Twitter's DMM will work through any initial orders to get a price quote for newly-issued shares. The price quote is typically in a range.

— At 9:30 a.m. company executives ring the bell to open the NYSE.

— Twitters' stock is expected to start trading Thursday morning, when traders will gather around the DMM. The traders, who represent dozens of clients and hundreds of investors who may buy or sell, start placing their own orders. The area can become crowded as dozens of traders compete for the attention of Twitter's DMM.

— Company executives head down to Twitter's location on the NYSE to observe the first trade.

— The NYSE's floor traders shout their orders to the DMM. Some investors want to buy the IPO, some are clients who got shares in the IPO overnight and want to sell a portion of their holdings. The DMM's job is to find that right price for a company's newly-offered shares.

“We're trying to give an opportunity to everyone to get into the stock,” says Matt Cheslock, a DMM for Virtu Financial who works at the NYSE.

— The DMM, floor traders and underwriters work to find the right starting price for newly-issued shares. This is called price discovery. For example, Twitter's price range of $23 to $25 may narrow to $23.50 to $25, if demand is high enough.

— Price discovery may take a few minutes or an hour once the market opens. It depends on how the underwriters and DMM want to handle a company's first trade and how much demand exists for an IPO stock, says David Ethridge, who heads up the IPO business for the NYSE. For example, Chinese tech company 58.com went public last week and it took roughly 20 minutes from the opening bell to start trading. Mortgage insurance company Essent Group, which went public the same day, took about 35 minutes to begin trading.

“When you're getting close to that first trade, you can really feel the energy in the room start to rise,” says Jonathan Corpina, a NYSE floor trader with Meridian Equity Partners.

— Once the DMM thinks the company's stock is priced correctly, he or she will “freeze the book,” saying that that no more stock orders can be placed. The accepted orders are processed, and the stock opens to trading. If problems arise, the NYSE can bypass the electronic system and use humans to trade Twitter's stock, Cheslock said.

— Once the stock starts trading, any investor can start buying and selling the shares. Individual investors often buy new shares of a company at this point. IPOs are very risky though. Even if the company is considered a good investment, its shares can struggle once the enthusiasm for the IPO fades. For example, Facebook's shares had an IPO price of $38, but fell as low as $18 each in the months after it went public.

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Contact Ken Sweet at http://Twitter.com/kensweet