- Slack’s direct listing on Thursday will be the second one conducted at the New York Stock Exchange where human traders on the floor, known as designated market makers, play an important role in the process.
- Citadel Securities, which served as Spotify’s DMM for its direct listing in 2018, will use its team of human traders to discover the appropriate opening price for Slack’s stock.
- During a direct listing no new shares of the company are issued and there are no bank underwriters, meaning there’s less information regarding what price the stock should open at and greater risk of wild price swings once it is public.
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Citadel Securities is one of the most tech-savvy firms on Wall Street, but on Thursday it’s the firm’s humans who will take center stage.
As one of the largest market makers in the world, Citadel Securities is an expert in cutting-edge technology. However, its designated market maker (DMM) business, the human traders that handle companies listed on the New York Stock Exchange, is what will be in the spotlight when Slack hits the public market via a direct listing Thursday.
DMMs, of which there are only a handful, play an important role during traditional initial public offerings, as they work with the bankers involved in the listing to set the opening price and ensure the stock trades smoothly once live.
The role of a DMM, however, is magnified during a direct listing, in which new shares of the stock are not issued and less information is made available to help them discover the appropriate price to open at.
“You don’t necessarily know the number of shares coming to market and you don’t really have an exact sense of the price that investors are looking to pay for the shares,” Joe Mecane, head of execution services at Citadel Securities, told Business Insider. “That puts additional focus on opening up the stock.”
With a traditional IPO, bankers involved in the process gauge investor interest in the new shares leading up to the public float and a price is set based on market demand.
DMM’s don’t have the same luxury during direct listings, instead relying on a reference price established by NYSE beforehand, which is typically based off of how the company has traded in the private market. Even so, the transactions in the private market don’t always give an indication of the public’s appetite for a stock.
Spotify, the first company to conduct at direct listing at NYSE, had a reference price of $US132. The following day, Citadel Securities opened shares for the stock at $US165.90 before eventually settling at $US149.01 by the end of the trading session.
“Ultimately where the stock is going to open is purely a function of supply and demand,” Mecane said. “The reference price may help inform it and it is certainly a starting point that some investors use as a valuation metric, but how much it relates to the actual opening price is to be determined.”
To be clear, DMMs aren’t a requirement of direct listings. Nasdaq, which does not have DMMs, has performed several direct listings for companies since 2014.
The difference, however, is the size of the companies that have gone to market at each exchange. Nasdaq’s direct listings were with much smaller companies. Still, in February Nasdaq filed a rule change with the Securities and Exchange Commission to both clarify its requirements for direct listing and to remind the Street it was a viable option for companies looking to take the route.
Mecane maintains for large companies that want to direct list, DMMs plays a key role.
“You want someone who is responsible for getting your stock to open and trade smoothly with limited volatility,” Mecane said. “The DMM model essentially creates that obligation and responsibility. I think direct listings are a natural fit for the DMM model.”
For all the legwork required of a DMM, the fees collected aren’t particularly large. However, serving as one does provide an inside track to corporations requiring other services, such as interest rate swaps for hedging or treasuries for cash management.
They can also get involved in company buybacks in which corporates purchase their own shares. DMMs stand to potentially help their clients with the process, getting a cut of an $US800 billion business.
And while humans are more involved in direct listing than traditional IPOs, that’s not to say technology plays no part in the process. While setting the price is labour intensive, ensuring the stock remains stable once its opened is a job largely for Citadel Securities’ technology.
“We are responsible for dampening volatility in the stock, filling in the gaps with our own liquidity and generally supplying liquidity to the marketplace,” Mecane said. “Some of this is done manually by traders who are physically on the floor but a lot is done through our automated upstairs technology.”
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