NYSE runs Twitter IPO test

The New York Stock Exchange (NYSE) on Saturday did a test run of Twitter's highly anticipated market debut, as it seeks to avoid the types of problems that plagued Facebook's initial public offering (IPO) on rival Nasdaq.

The Big Board, run by NYSE Euronext, regularly does systems testing on the weekends, but this was the first time it had run a simulated IPO, and it did so at the request of its member firms - many of whom took part in Facebook's 2012 IPO on Nasdaq OMX Group's main exchange.

The NYSE was testing mainly for two things: To see if its systems could handle the amount of message traffic that might be generated by the IPO; and to make sure that once the IPO took place, any firms that placed orders would promptly receive the reports telling them that their orders had been executed.

It can also be seen as part of NYSE's struggle with Nasdaq for supremacy in technology listings. Both exchanges vied to be home to Twitter's stock, and many analysts said the trading disruptions that occurred on Facebook's Nasdaq debut likely played to NYSE's favour, as it tries to become the destination of choice for technology listings, something Nasdaq once dominated.

Twitter, which intends to sell 70 million shares at between $17 and $20 each, will be holding the biggest Internet IPO since Facebook, which sold a much larger 421 million shares at $38 each. Twitter is expected to start trading as early as 7 November.

In the case of Facebook, the tremendous volume of orders on the first day of trading exposed a glitch in Nasdaq's system, ultimately preventing timely order confirmations for many traders, leaving them unsure about their exposure for hours, and in some cases for days afterwards. Major market makers estimated they lost collectively up to $500 million in the IPO.

The absence of Nasdaq CEO Robert Greifeld while the meltdown was occurring magnified the criticism toward the exchange - he had been celebrating the debut at Facebook's California headquarters before jumping on a plane back to New York.

Nasdaq was fined $10 million by the US Securities and Exchange Commission - the largest fine ever for an exchange - and said it would voluntarily pay up to $62 million to compensate firms that had been harmed. On Friday, Nasdaq said $41.6 million of claims put forward qualified for the compensation plan.

The chaotic debut also contributed to a decline in Facebook's stock. The stock hit a low of $17.55 in August, though it has since more than recovered the losses, closing on Friday at $51.95, well above its IPO price.

While Nasdaq had tested its systems in the lead-up to the IPO, allowing member firms to place dummy orders to a test symbol over a specific period, it limited the total number of orders that could be received in the simulation to 40 000. On the day of the IPO, over 496 000 orders were placed before the IPO opened, with around 82 million shares traded. By the end of the day, more than 500 million shares had traded hands, a record for an IPO.

NYSE's tests on Saturday ran hundreds of thousands of orders, with one single firm placing an order at one point for nearly 81 million shares.

"This morning's systems test was successful, and we're grateful to all the firms that chose to participate," an NYSE spokesman said. "We are being very methodical in our planning for Twitter's IPO, and are working together with the industry to ensure a world-class experience for Twitter, retail investors and all market participants."

On an average trading day, there are around 700 people on the floor of the Big Board, dressed in business suits, many also wearing blue jackets with their firms' names emblazoned on them.

On Saturday, about 20 people - floor operators, technicians, and designated market makers, who are akin to air traffic controllers for stocks, overseeing trading and ensuring fair and orderly markets - gathered in small groups around various screens, dressed in jeans and sipping coffees.

At 7am, just as they would for an actual IPO, over 20 NYSE member firms began sending in their orders for the Twitter IPO simulation. The market opened up as it normally would at 9:30am, but in this case using data from Friday to recreate a normal environment, with 3 800 listed stock trading. IPO orders kept coming in and NYSE had a phone line open to keep members apprised of the situation and to answer questions.

Shortly before 10am, the first of three test IPOs to mimic the Twitter debut took place, using the symbol IPOA.

The designated market maker (DMM), in this case a representative from Barclays, ran the auction, with orders coming in electronically on a screen and from brokers on the floor using handheld computers.

A major difference between NYSE's system and Nasdaq's is that Nasdaq's is fully electronic, while NYSE's normal IPO procedures include human intervention, through the DMM.

Once a price had been determined, based on the orders that had come in, and following communication with the investment bankers and brokers, the DMM froze the order book and hit a blue "DONE" button on his keyboard. Immediately after, alerts went off on the brokers' handheld devices indicating their orders had been executed.

A NYSE employee on the floor wearing a Bluetooth earpiece, who was connected to the call with member firms, called out the action as it happened.

The exercise was completed two more times, using test symbols IPOB and IPOC, with KCG Holdings and Goldman Sachs as DMMs, and with saws and drills buzzing in the background from weekend renovations, instead of the usual din of traders.

Both NYSE and Nasdaq have said 2013 is shaping up to be their best IPO year in more than half a decade.

Twitter has set a relatively modest price range for its closely watched IPO, but some financial advisers say their clients are not clamouring to invest in the social media phenomenon.

"Nary a tweet," says William Baldwin, president of Pillar Financial Advisors in Waltham, Massachusetts, when asked about client interest in the deal.

Out of 29 broker-dealers and independent advisers contacted by Reuters, 23 said they are not recommending Twitter shares. Only one said he would recommend it - and only to certain clients. Five others said they would wait to snap up the stock if it plunges after it begins to trade on the NYSE.

While retail interest might be low, tech industry analysts say there is expected to be a good appetite for Twitter stock from institutional investors at the current valuation. Actual institutional investor sentiment still remains unclear. Retail investors typically account for 10% to 15% of IPOs.

Twitter said on Thursday it will sell 70 million shares at between $17 and $20 apiece, valuing the online messaging company at up to about $11 billion, less than the $15 billion that some analysts had been expecting. If underwriters choose to sell an additional allotment of 10.5 million shares, the IPO could raise as much as $1.6 billion.

Blame last year's botched Facebook IPO for the diminished interest from Mom and Pop in Twitter.

When the social networking giant's stock hit the market in May 2012, it encountered allocation problems, trading glitches and a sell-off - shares did not recover their IPO price until a year later.

"People are still smarting from that experience," says Ren'e Nourse, a financial adviser at Urban Wealth Management in El Segundo, California. Part of the problem is that investors do not understand Twitter the way they "got" Facebook, Nourse and other advisers say.

Three brokers with Morgan Stanley, which was lead underwriter on the Facebook IPO, said clients are showing little or no interest in Twitter.

"With the debacle over Facebook, I haven't had one client ask about it," said one of the brokers, based in the southeast. The broker asked not to be identified because they were not authorised to speak to the media.

Another broker, based in northern California, said: "Silicon Valley deals have been super-red hot, but I've had no inquiries from clients" about Twitter.

All in all, Twitter is no Facebook.

While Twitter relies on advertising like Facebook to make money, it is not profitable. Twitter also has a smaller, less-engaged audience and it is not issuing as much stock, argues Kile Lewis, co-chief executive and founder of oXYGen Financial, an independent financial advisory firm that focuses on clients in their 30s and 40s, also known as Generation X and Generation Y.

"In spite of the 'glow' from most on Wall Street, I find it hard to make a recommendation for a company that is running a... loss," Lewis says. "Until they have a clear plan to monetise their product, it seems too risky."

Twitter more than doubled its third-quarter revenue to $168.6 million, but net losses widened to $64.6 million in the September quarter, it disclosed in a filing earlier this month.

Since its creator Jack Dorsey sent out the first-ever tweet in March 2006, the micro-blogging platform has grown to more than 200 million regular users posting more than 400 million tweets a day.

Twitter is expected to set a final IPO price on 6 November, according to a document reviewed by Reuters, suggesting the stock could begin trading as early as 7 November.

For individual investors, however, the pendulum is swinging the other way. An online poll conducted through Friday morning on Reuters.com found that 57% of 225 respondents want to invest in the IPO at the range of $17 to $20, while 28% are not interested in the stock. Fifteen percent say they are waiting to buy the shares on the open market.

One cautious investor is Betty Tanguilig, a 75-year-old retiree and mother of eight. Back when Facebook launched, she was furious that her financial adviser Alan Haft, with California-based Kelly Haft Financial, could not get her more than $46 000 worth of shares from a $400 000 account to buy shares of the social networking site.

Now, Tanguilig is taking a more measured approach to the Twitter IPO. Even though her investment in Facebook is up 40%, she says she wants to wait and see how Twitter performs before jumping into the stock.

Tanguilig's hesitance about Twitter is not the result of a lesson learned from the mishaps of the Facebook IPO, but because, like many of her peers, Tanguilig does not quite get Twitter.

"I use Facebook, I read what people are doing... but I have never used Twitter," she said. "I will give it a week," she said. "And if it does well, I would put in around $20 000."

Several independent advisers said it suited their investment styles more to wait and see how Twitter performed after the offering.

"We expect that Twitter will fall in value eventually post-offering," said Stacy Francis, president and CEO of Francis Financial in New York. "That is the ideal time to buy."

An adviser at Raymond James said he would also advise certain clients to buy at the post-IPO price if the stock tanks on the first day. The adviser asked not to be identified because they were not authorised to speak to the media.

Betsy Billard, an adviser at Ameriprise Financial with offices in Los Angeles and New York, said most large-company mutual funds will be buyers. "My clients will own it - whether they want it or not," Billard says.