There are few things more anticipated in the stock market than an initial public offering, or IPO.
IPOs occur when companies offer their stock, or shares of the firm, to the public for the first time.
There are a few exchanges in the US on which stocks are traded, and thus IPOs can take place.
The New York Stock Exchange is the largest and oldest of these exchanges, dating from 1792, and it sits in its iconic home on Wall Street.
Business Insider got a backstage look at one of the IPO days through the eyes of Carolyn Saacke, the chief operating officer for NYSE’s capital-markets business. The capital-markets business oversees all IPOs and maintains relationships with the firms that are already listed on the NYSE.
Here’s a backstage look at the wild day of an IPO:
The NYSE is housed in this historic building on the corner of Wall Street and Broad Street. Since the attacks on September 11, 2001, the street has been closed to traffic for security reasons. Additionally, all traders and guests for the IPO must now go through security checks.
The IPO of the day is e.l.f. Cosmetics -- e.l.f. stands for eyes, lips, and face -- a value cosmetics firm founded in 2004.
e.l.f. had the entire exchange to itself that day, but it is possible for multiple companies to IPO in the same morning. We were told those are some of the busiest days.
By 8:30 a.m., she's already in a meeting with NYSE Group President Tom Farley and other top NYSE executives. They plan out the strategy for the day, discussing everything from the marketing promotions for e.l.f. and NYSE to the long-term strategy for attracting new listings.
Every IPO is a big deal for the company, a culmination of years of hard work. To celebrate, the firm enjoys a breakfast in the private ballroom a few floors above the NYSE trading floor. e.l.f. has about 180 employees, beauty bloggers, and family members on hand for the event.
She milled around the breakfast, talking to executives and employees of e.l.f. as well as representatives of the underwriters. Underwriters help to find buyers of the stock offering and bring the IPO to market. In e.l.f.'s case, about 8.3 million shares were offered for an estimated US$52.3 million, and there was a syndicate of banks involved, including Stifel, Wells Fargo, and SunTrust. Within the syndicate there are lead underwriters who take charge of the IPO (and nets the most fees). In e.l.f.'s case, this was JPMorgan and Morgan Stanley.
Each member of the e.l.f. delegation was presented with a commemorative medallion certifying the day of the IPO and the company's debut as a public firm. None of the ceremonial material, including a large stock certificate of the IPO, are dated until the day of the IPO.
'We're very superstitious around here,' said Carolyn. 'We don't date anything until the company actually lists.'
The main bell that opens the trading day at 9:30 no longer uses a gavel but instead uses a button. This gavel will get used a little later in the morning.
Carolyn's role starts months before the company ever makes it to the floor. Carolyn helps court firms to have their IPOs on the NYSE instead of a competitor. She talks to them about choosing the lawyers or bankers for the IPO, and even the marketing strategy around the event. By the time e.l.f. made it to the NYSE, Carolyn said she had been working with the executives for more than seven months.
During the pre-IPO ceremony NYSE executives help reassure the e.l.f. executives that everything will run smoothly. Carolyn said she has 'a lot of faith' in the various teams.
It's the little things that make an IPO at the NYSE special, Carolyn said. For instance, every guest of e.l.f is given a large metal nameplate to wear throughout the day.
'Some people come back for other IPOs and they bring their old badge as a kind of collector's item,' she said. 'It's very cool to see.'
Also on display was a bit of e.l.f flair. Men were wearing lapel pins, and some even had the e.l.f. logo stitched into the lapel. Carolyn noted that most companies use it as a celebration of their success, but for retail- and consumer-focused companies, it is a huge branding opportunity.
There is a ceremonial opening of the stock exchange. The bell must be rung for 10 seconds to mark the opening of the trading day. If the ringing does not last 10 seconds, the traders on the floor will boo the executive. Carolyn said P. Diddy was booed after the hip-hop star and business mogul didn't ring the bell long enough.
e.l.f. went on a long roadshow with their underwriting bank talking to potential investors to gauge demand for the IPO. Then, taking in the information they gleaned, the company and underwriter set a price range a few days before the stock was set to open.
In e.l.f.'s case, the range was set from $14 to $16 per share.
There are always things that could go wrong, from outside events like a sudden collapse in markets or a terrorist attack to internal computer problems. This uncertainty leading up to the IPO can make it nerve-racking, but Carolyn said the NYSE tried to be as prepared as possible.
'We do these transactions all the time, so we have a lot of practice,' said Carolyn. 'We also have redundant systems in case there is an issue to make sure everything goes smoothly.'
In fact, when NYSE hosted Chinese e-commerce giant Alibaba's IPO -- the largest offering ever -- the exchange held practice runs on the preceding weekend to make sure the computer systems and employees could manage the massive day.
The night before the IPO, the underwriter adjusts the price based on more information and demand from possible investors. e.l.f ended up pricing the night before at $17 per share. This is the basis for the process on the morning of the IPO.
Traders assemble at one of six designated market-maker booths (more on that later) with handsets and headsets on.
The market maker, in this case Citadel Securities, helps to set the price of the stock during the IPO.
There are six designated market makers, and each typically goes through a series of interviews with the company to determine the best fit for the listing firm. The company then picks one.
On the day of the IPO, the floor governor for the market maker evaluates orders and demand on both the sell and the buy side for the stock to help find where it should be priced.
The NYSE is unique in the sense that IPOs are still done using a modified open outcry technique. The market maker will evaluate the orders on his screen as they come in, and then occasionally turn and yell to the assembled traders the rough estimate of the demand and price for the stock.
According to Carolyn, it takes a stock about 11 minutes, on average, to find its correct price and start to trade though NYSE's method -- though consumer brands and tech deals typically take a bit longer because of increased interest from retail investors.
Interestingly enough, we were told that there is one bank that usually takes longer than others before they feel comfortable opening a stock: Goldman Sachs. The investment bank takes three to four minutes longer on average than the rest of the banks to ensure that the right price is found. We were not told why this is.
Children aren't usually allowed on the NYSE floor, but given e.l.f's history the exchange decided that it would bend the rules. 'In this case, since the company was built by a family and is family-oriented, we decided to make an exception,' Carolyn said.
The NYSE offers a video stream to all employees of the firm having their IPO who can't be there in person. The NYSE's head of marketing -- pictured here with Carolyn -- explains the price-discovery process and where the company is pricing. During the e.l.f. broadcast, NYSE President Tom Farley also addressed the employees, thanking them for their contributions.
The NYSE does not open the stock until the bankers underwriting the IPO and the market maker feel satisfied that the proper price has been found. Carolyn said this ensures that the price is reasonably stable coming out of the gate, instead of suddenly rising or dropping when it is opened. e.l.f. took a bit longer than most, opening 35 minutes later than the broader market.
Eventually, Citadel believes it has the right price for the stock to begin trading, in this case $24 per share. Carolyn described e.l.f.'s price-discovery process as 'textbook' and felt great about where the stock opened.
e.l.f. CEO Tarang Amin took the ceremonial gavel and struck the bell while sitting right next to the Citadel station, officially opening the e.l.f. stock for trading. The stock stuck roughly around the opening trading price of $24 per share throughout the day, proving the price was well set with both sellers and buyers around that price. (The scrum was so tight that our intrepid photographer, Hollis Johnson, stuck his camera up and managed to snap at exactly the right time.)
e.l.f distributed some of its products around the floor, and many companies have some sort of branded giveaway on the day of the IPO. One trader joked that he wasn't going to open the lipstick right then, but said 'after hours, you never know.' He took a selfie with a fashion blogger.
Carolyn noted that many CEOs ('even of the bigger companies that you wouldn't expect') cry on IPO day, either during the ringing of the opening trading bell or when they take the gavel to the bell that opens their own company. As far as we could tell Amin did not cry, but he was certainly excited.
After the frenzy of the IPO, the trading floor quieted. With much of the trading done by computers and algorithms these days, the high-pressure shouting and paper tossing have been reduced quite a lot.
As Carolyn rushed off to attend meetings with other potential listers, we spoke with Jay Woods, floor governor for IMG Financial Markets, one of the other designated market makers on the floor. He explained that much of his trading is done by computers now, but in times of increased volatility he can still step in and trade manually.
Additionally, even after ushering in the IPO, Woods said that the market maker still maintains a relationship with the firm. Market makers monitor demand in stocks they have listed and take calls from executives asking about price action in their shares.
And then it's all over and the day goes back to normal. e.l.f. guests went out front of the NYSE to revel in the day -- there were free makeovers available using e.l.f. products -- while the traders went about their day. In days following the IPO, e.l.f held up quite well, closing trading on Thursday at $26.85, a nice 11.9% bounce from the price at which it opened.
For Carolyn, the rest of the day is filled with meetings on long-term planning for the NYSE and events, such as a conference for women in business. While there isn't an IPO every day -- in the early part of 2016 there were the fewest IPOs in the US since the financial crisis -- there are enough to keep Carolyn busy. Just the next day, oil manufacturer Valvoline was scheduled to have its offering. So in just 19 hours, it would all start over again.
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