The 2012 Listing That Broke on Day OneEasy

A large technology listing priced at the top of a raised range, on a raised deal size, into an exchange system that could not process the opening auction.

3 min read · 491 words

What happened

• May 2012 — a large social network lists on a US exchange. During the roadshow both the price range and the number of shares offered are increased.
• Opening day — the exchange's opening auction system fails to process orders correctly. The open is delayed by around half an hour and confirmations are delayed for hours; many investors do not know whether their orders executed.
• The shares close the first day near the offer price, supported by stabilisation, and fall substantially over the following weeks.
• The exchange later agreed to pay a penalty to the SEC over the systems and rules issues in the opening.
• Litigation and regulatory attention also focused on how revised guidance during the roadshow reached different classes of investor.

The mechanism

• The discount exists for a reason. An offering priced to the last dollar has no aftermarket cushion, and the buyers who were meant to hold the shares hold a loss instead — see the ECM desk.
• Raising price and size together removes the cushion twice. More shares at a higher price is more supply meeting a book that was built at lower ones.
• The over-allotment is bounded. It can support an opening; it cannot support a repricing, and its size is fixed before anybody knows which is needed.
• An opening auction is infrastructure, not a market view. When it fails, price discovery has not happened and nobody can tell an execution from an unfilled order.
• Selective distribution of revised guidance is a disclosure question, independent of whether the price was right.

What it teaches

• A first-day fall is not a verdict on the company. It is the outcome of a pricing decision and an allocation, both made days earlier.
• Look at whether the deal size was increased. The final size relative to the original filing says more about the pricing than the range does.
• Settlement and market infrastructure are a real risk on a listing day, and they are nobody's diligence item.
• Stabilisation is a disclosed, time-limited activity, not a floor under the price. The calculator shows both ways the short can end.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• IPO — the process, and where the price is actually decided.
• Greenshoe and stabilisation — what support is permitted and for how long.
• Direct listing — the route that declines the book and the discount.
• Clearing and settlement — why an opening auction is plumbing.