Why new IPOs aren’t available at market open


New IPOs tend to sound rather appealing, especially with the fast pace in which they roll out these days. An attainable share price that’s bound to inflate? Yes, please. For most retail investors, however, IPOs aren’t readily available at 9:30 a.m. Eastern, or market open. But why?

You’d think it would have something to do with the modern tech we use to trade stocks in the 21st century (like a turn-it-off-and-back-on-again situation). Instead, it’s mostly demand, human nature, and the sentimental bearings that affect our marketplace.

TL;DR

  • IPOs aren’t officially available to the general public right at market open. This is because of a practice rooted in the NYSE archives.
  • The Designated Market Maker (DMM) goes through a price discovery process using the open outcry method. The goal here is to determine a balanced price based on demand for the security.
  • Companies aim for a pop by market close, but they don’t always get it.
  • Limit orders on new IPO stock are usually futile. You could set your limit too high and overpay or you could set your limit too low and the trade will fail to execute.
  • Institutional, preferred, and accredited investors typically have access to IPO debut prices.

The anatomy of an IPO on the debut date

You can imagine that executives, shareholders, and venture capitalists are buzzing on the date a company goes public. So, too, is the trading floor, where the market movers and shakers congregate.

Ahead of an IPO, a bookrunner (aka underwriter) helps a company price their IPO. Here’s what happens on the day of an IPO, and the reason why retail investors don’t have access to the IPO stock for hours after market open.

Price discovery

Price discovery dates back to an old New York Stock Exchange practice. The NYSE was founded in 1817, so you can imagine this process is not one that would have been developed today. Despite that, exchanges in the U.S. follow pretty much the same path on any given IPO date.

A Designated Market Maker (DMM) has assigned securities, so the DMM for a freshly public stock is in charge at an IPO’s first market open. Here, the DMM’s job is to discover the level of interest for the stock from buyers. The price discovery is reported based on a point system.

While they’re not the only exchange to practice price discovery, the NYSE says they prioritize price discovery over speed more so than other exchanges.

So what does the DMM price discovery process look like in action? You could equate it to an auction, where buyers on the trading floor rally around the DMM. This occurs before trading opens up to the public.

Open outcry

Next comes the open outcry from the buyers. Let’s envision those buyers surrounding the DMM for the IPO stock. In true stock market fashion, they start verbalizing their demand for the IPO. If the in-person demand is booming, the DMM knows the demand for the stock is high. If the in-person demand seems mediocre, the stock’s demand may be mediocre, too. For the DMM, this signals where a price should land for selling IPO shares.

Ultimately, the DMM uses the open outcry as a way to discover a solid price for IPO shareholders to sell. When they’re ready, they signal that they’ve firmed up a price to begin officially trading. 

By modern standards, the price discovery and open outcry phases are usually pretty lengthy processes of at least a few hours. That’s why IPO shares are not available to the general public right at market open—because the stock exchange is literally doing their bidding. 

Pop

This is the amount of upward movement by 4:30 p.m. Eastern, or market close. Oftentimes, company shares trade much higher by the end of the day than they did at the start. This shows significant demand for a stock, even if the security winds up volatile in the future.

Related: Direct listings vs. IPOs

Why do price discovery at all?

It’s not unheard of for a company’s share price to sink lower than its initial offering price. However, exchanges try to prevent this by accurately assessing demand prior to open trading. By using a supply and demand points system for IPO stock, DMMs contribute to a more stable stock market.

FAQ about new IPOs

1. What time do IPOs open on the first day of trading?

Preferred and institutional investors can access IPOs at the pre-market listing price, usually starting around 9:15 a.m. IPOs often open up for official trading by mid-morning or mid-day (typically after 10:00 a.m.). Companies prefer to have as much time as possible on the first trading day to get a big pop.

2. Do all IPOs pop?

Not every IPO is successful right off the bat. We saw it with Facebook, which began trading in 2012 at $42 per share and fell to $18 per share about three months later. In late 2020, Airbnb fell 13.76% in the first five days it was public. Both of these companies eventually found their footing, but they didn’t experience the quintessential pop.

Usually, companies want a pop, so they price slightly below the fair value, as prescribed by their underwriters. This helps increase demand in the early days of the IPO, but it also provides an incentive to early investors to hold their positions.

Related: What to know about Airbnb’s 2020 IPO

3. If you place a limit order on new IPO stock, will you get it?

Many investors agree that it’s not best practice to utilize limit orders on new IPO stock. Why? Because demand is hard to predict. Instead, investors can buy or sell at the market value during open market hours (between 9:30 a.m. – 4:00 p.m. Eastern). If you set your limit order too high, you may regret it. If you set it too low, your brokerage may not be able to execute the trade.

4. How can you gain access as a preferred investor to new IPOs?

If you really want to hit the ground running on fledgling IPO stock, look at the company’s underwriters (these will likely be big banks like JPMorgan, Merrill Lynch, Goldman Sachs, and others). If you have a brokerage account with any of these companies, you may be able to request IPO stock allocation. 

Your account will have to reach a certain level of stature and activity for you to be considered, and the rules vary between institutions. Accredited investors are often preferred—these are the same people or organizations that can access unregistered securities. 

Related: What are price targets?

Bottom line

A recent boost in individual investors has pushed the market to lean younger and more diverse. But despite the newly held power of these demographics in shareholder relations, institutional players are still holding their weight when it comes time for the IPO. The market favors those with connections, and that’s not always representative of the retail investment population.

Interestingly, one company tried to change this dynamic. To prepare for their 2021 IPO, Deliveroo made IPO-price shares available to existing customers upon request through their food delivery app. Perhaps other companies will follow suit.

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

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