There are few things more anticipated in the stock market than an initial public offering, or IPO.
Snap Inc., the parent company of Snapchat, made its debut as a public company on Thursday in the biggest tech IPO in years.
There are a few exchanges in the US on which stocks are traded, and thus on which IPOs can take place.
The New York Stock Exchange is the largest and oldest of these exchanges, starting in 1792, and it sits in its iconic home on Wall Street.
In 2016, 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.
To give you a sense of what’s happening on the floor, here’s a behind-the-scenes 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 -- it 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 have IPOs 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 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.
Carolyn 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 $US141.7 million, and a syndicate of banks were involved.
Within the syndicate are lead underwriters who take charge of the IPO (and net 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, is dated until the day of the IPO.
'We're very superstitious around here,' Carolyn said. 'We don't date anything until the company actually lists.'
The bell that opens the trading day at 9:30 actually uses a button to ring the bell, but this gavel will be 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 on 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 their lapels. 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 and 15 seconds at the end of the trading day. If the ringing does not last 10 seconds, the traders on the floor will boo the executive. A few traders told us that P. Diddy was booed after the hip-hop star and business mogul didn't ring the closing bell long enough.
e.l.f. went on a long roadshow with its underwriting bank talking to potential investors to gauge demand for the IPO. With the information they gleaned, the company and underwriter set a price range a couple of weeks before the stock was set to open.
In e.l.f.'s case, the range was set at $US14 to $US16 per share.
There are always things that could go wrong, including outside events, like a sudden collapse in markets or a terrorist attack, or internal computer problems. This uncertainty leading up to the IPO can make it nerve-racking, but Saacke said the NYSE tries to be as prepared as possible.
'We do these transactions all the time, so we have a lot of practice,' Carolyn said. 'We also have redundant systems in case there is an issue to make sure everything goes smoothly.'
In fact, when the NYSE hosted Chinese e-commerce giant Alibaba's IPO -- the largest offering ever -- the exchange held practice runs the weekend before 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 $US17 per share. This is the basis for the process on the morning of the IPO.
Traders assemble at one of six designated market-maker posts (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 Saacke, 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, some traders on the floor told us that there's one bank that usually takes longer than others before it feels 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 during typical trading days, but IPOs are an exception. Given e.l.f's history -- two of the original executives of e.l.f. were a father-son duo -- it was quite the family affair.
The NYSE offers a video stream to all employees of the firm having its IPO who can't be there in person. A NYSE marketing executive -- pictured here with Carolyn -- explains the price discovery process and where the company is pricing.
During the e.l.f. broadcast, Farley also addressed the employees, thanking them for their contributions.
The NYSE does not open the stock until the bank team 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 $US24 per share. Saacke described e.l.f.'s price-discovery process as 'textbook' and said she felt great about where the stock opened.
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 shares stuck roughly around $US24 throughout the day, proving the price was set well 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 Saacke rushed off to attend meetings with other potential listers, we spoke with Jay Woods, floor governor for IMC 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.
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 -- free makeovers were 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 $US26.85 per share, a nice 11.9% bounce from the opening price.
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 -- the early part of 2016 had the fewest IPOs in the US since the financial crisis -- there are enough to keep Carolyn busy.
Just the next day, the oil manufacturer Valvoline was scheduled to have its offering. So in just 19 hours, it would all start over again.
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