Twitter’s IPO will be a chance for humans to notch a big win over robots

The calm before the storm.
The calm before the storm.
Image: AP Photo/Richard Drew
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Twitter is set to go public this week, with its shares slated to start trading for the first time this morning (Nov. 6).

How does this happen exactly? And what does it mean? Settle down. We’re about to lay it out for you.

Setting the price

It’s the moment when the company going public gets its money by selling its shares to the underwriters—the group of banks managing the public offering, led in this instance Goldman Sachs. The underwriters get the stock (and assume the risk) which they then offload to the final investors—mostly institutional entities like mutual funds and pension funds. The underwriters have spent weeks lining up these investors up to buy the shares; the investors have told the underwriters what they’d be willing to pay, and how much stock they want to buy. That back-and-forth produces the final IPO price, which determines how much money the company actually raises.

The opening bell

The stock usually starts trading the day after the company’s shares “price,” and this has become a minefield-strewn moment for IPOs. Back in May 2012, Facebook’s first day of trading turned into a dog’s breakfast on the Nasdaq. And when an electronic exchange by the name of BATS tried to go public using its own exchange technology in March 2012, it was an unmitigated disaster that eventually forced the company to call the entire process off. (Some called it the worst IPO fail ever.) Perhaps in part because of the Facebook snarls, Twitter has opted to list its shares on the New York Stock Exchange, which is where all the action will be Thursday morning.

IPOs work a little bit differently at the NYSE, where the process still involves actual humans known as “designated market makers, who not only match buyers and sellers, but also buy and sell shares using their own money in order to keep a liquid, orderly trading environment. The “designated market maker” overseeing the opening of Twitter’s shares Thursday will act as a sort of air traffic controller for buyers and sellers, keeping a close eye on electronic trading and dealing with some actual orders coming in from the floor. The AP does a great job of summing it up here:

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…The DMM, floor traders and underwriters work to find the right starting price for newly-issued shares. This is called price discovery…Price discovery may take a few minutes or an hour once the market opens…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.

That last bit, the part about the humans, is a key component of how NYSE likes to distinguish itself from exchanges such as the all-electronic Nasdaq. “Their judgment and commitment of capital at the point of sale differentiates the NYSE from every other market globally,” the company says in IPO Guide of the DMMs.

The aftermath

If Twitter’s debut on the markets goes smoothly, it could be a big propaganda win for not only NYSE over its arch-rival Nasdaq, but also for all homo sapiens in our decades-long battle with the machines. After all, it was a computer snafu that sparked the infinite loop that so disrupted the Facebook IPO. (For a full tick-tock of what went wrong then, click here.) If a human hand or two in the process makes the difference between a pristine debut and a debacle, corporate chieftains might rethink the relentless push toward automation, at least where their share price is concerned.