In Facebook's wake, will exchanges face scrutiny in Twitter IPO?

Eighteen months after Facebook Inc.'s initial public offering was crippled by a Nasdaq OMX Group Inc. computer, equity markets get a shot at redemption Thursday when the New York Stock Exchange hosts the debut of Twitter Inc. While faulty trades are rare and more than 250 IPOs have been sold in the U.S. since Facebook, infrastructure mishaps, including issues of data transmission similar to those that hurt Facebook in May 2012, have shown few signs of abating. Nasdaq's three-hour shutdown in August and outages on stock and options venues from New York to Chicago in the past three weeks are straining the patience of regulators. That makes Twitter's arrival on the NYSE a critical test for an industry whose reputation has been riven by high-profile failures since the flash crash of May 2010. Securing the deal was a coup for Duncan Niederauer, the NYSE Euronext chief executive officer looking to prove his company can succeed where Nasdaq stumbled. “Investor perception and confidence is still shaky, so anytime we get a high-profile win, for instance Twitter's IPO, it will go a long way to building back that trust,” said Drew Nordlicht, managing director and partner at HighTower Advisors. His firm oversees $22 billion. “Trust is something that is earned, and when it is lost, it takes a while to earn it back.” Twitter will probably set the price for its IPO tonight and begin trading on the NYSE tomorrow. It's likely to raise more than $1.75 billion in a deal several times oversubscribed, two people with knowledge of the matter said this week. SWELLING DEMAND NYSE's challenge is to handle that kind of demand. More than 458 million shares of General Motors Co., which is listed on NYSE, changed hands when it began trading in November 2010. Facebook did 582 million shares in its first day last year. To make sure it's ready, NYSE recently let brokers test its technology. “A new generation of investors has not participated in either the market from the equity side, or avoided getting into the market because of challenges that the industry has faced,” Scott Cutler, executive vice president and head of global listings at NYSE Euronext, said yesterday. “This is an opportunity to rebuild confidence.” Mr. Cutler drew a distinction between Nasdaq and the NYSE, where the process of opening a newly public stock is aided by human market makers on the exchange's trading floor. Precautions have included replications aimed at duplicating expected order flow and turning on extra capacity. RIGHT PRICE “I don't expect that we will touch that capacity here, but we've effectively built the systems to handle as much volume as ever happened in any IPO,” he said. “We're confident in the systems, the technology and the people that all play into opening the stock ultimately at the right price.” Will Briganti, a spokesman for Nasdaq, declined to comment on Twitter's listing. Scrutiny is so high because IPOs have seen some of the biggest market-structure catastrophes. Nasdaq Stock Market member firms lost tens of millions of dollars in Facebook's public debut after the computer matching the first trade went into a loop and the open was delayed. Missing confirmations and confusion about prices were the first signs of trouble for a stock that fell more than 50 percent in less than four months. Nasdaq was fined $10 million by the Securities and Exchange Commission and faces $41.6 million in claims from members. The exchange, home to tech pioneers including Apple Inc. and Microsoft Corp., learned last month that it wouldn't be listing Twitter. Two months before the Facebook IPO, Bats Global Markets Inc., an all-electronic exchange operator, stunned Wall Street by failing to get its own IPO trading hours after it was priced. Flawed software was blamed by chief executive Joe Ratterman, who pulled the listing and now is in the process of merging with a rival, Direct Edge Holdings. “It's such a public event,” said Sang Lee, partner at Aite Group. “An IPO is something that everyone understands. When people talk about, 'There was an IPO, something happened and I couldn't buy my shares,' that's something that ties into the confidence of the market overall and the reputation of the exchanges.” For the 221-year-old NYSE, the debut is both a challenge and an opportunity to encroach further on Nasdaq's tech dominance. Twitter will join Pandora Media Inc., LinkedIn Corp. and Yelp Inc. as Internet companies that have listed on the NYSE since 2011. LISTING VENUES Although there are 13 exchanges among the more than 50 venues where U.S. stocks trade, NYSE and Nasdaq are the only two where companies go public. Competition for IPOs is critical for both, which get about a fifth of revenue from listing fees and related services. While Nasdaq once dominated technology and Internet IPOs, NYSE Euronext has started to reverse the trend. Between the start of 2011 and yesterday, NYSE won 46 IPOs from those industries, with $8.7 billion raised, according to data compiled by Bloomberg. Nasdaq secured 44 companies raising $24.7 billion, including the $16 billion that Facebook received. “This is a nice win for the NYSE, and they definitely don't want to see a problem like Nasdaq had with Facebook just for pure competitive reasons,” said Richard Repetto, an analyst at Sandler O'Neill & Partners. “Everybody is trying to do the best they can to ensure that there are no problems.” In the past three months, exchanges have reported multiple instances of information lines being snarled. Price dissemination among options venues broke down Sept. 16 when the central conduit operated by an NYSE Euronext unit that links a dozen exchanges faltered, forcing all to shut briefly. The mishaps have become so frequent and serious that Standard & Poor's said in September that credit ratings for exchanges worldwide may be cut if they're not addressed. After Nasdaq's Aug. 22 data-feed error prevented thousands of U.S. stocks from trading for three hours, SEC Chairman Mary Jo White demanded an industry response. Breakdowns “involved relatively basic, albeit serious, errors,” she said at a Security Traders Association conference in Washington on Oct. 2. “Many could have happened in a less complex market structure, but the persistent recurrence of these events can undermine the confidence of investors and public companies.” While Mr. Niederauer may have benefited from Nasdaq's Facebook errors by winning Twitter's listing, he said he took no pleasure from his rival's misstep. BURNING INVESTORS “We were disappointed rather than celebrating that outcome,” he told Bloomberg Businessweek during an interview published in August. “That was the IPO that everyone was going to participate in. Individuals could own a piece of a symbol of what the next wave of innovation was all going to be about,” he said. “And people got burned.” Getting Twitter right would be a public relations victory for the NYSE, said Josef Schuster, the founder of IPOX Schuster. His firm provides research on IPOs. “A lot of credibility is at stake for NYSE,” Mr. Schuster said. “I'm fairly optimistic they will be able to handle the situation.” (Bloomberg News)