Why do stocks have to sell at one given opening price? I ask this honestly- I don't understand how public markets work in this respect.
What if instead, a giant silent auction occurred. All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left. This would maximize the income for the founders/investors and achieve a market rate that is fair and accurate.
Spotify is doing something like that (direct listing makes the stock be subject to the usual auction-like mechanism of the stock market from the moment it goes public).
> Spotify AB has filed confidentially with the Securities and Exchange Commission to go public via a direct listing, in which it won't sell shares in an initial public offering but will instead just one day declare that it is public and let anyone who wants to trade its shares.
The article also explains why Google's case was more akin to a traditional IPO than Spotify's.
The auction you mentioned would not be a good one. If bidders don't know that they will be protected by a single clearing price, they will drastically reduce their bids. It would basically guarantee that everyone who won the auction would be immediately under water. This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good.
Generally speaking, the highest single price that clears the entire demand is best, and would result in bidders submitting their most honest and aggressive bids.
The problem with IPO "auctions" is not that they're at one price, but that they aren't really auctions at all. It's just a private negotiation wrought with many conflicts of interest. Dropbox, for example, had 25x more demand to pay $21 a share than actually traded. And instead of raising the price further to clear the market at a fair valuation, banks instead used this archaic matching system to give shares at below-market valuation to themselves and their friends in hedge funds.
> It would basically guarantee that everyone who won the auction would be immediately under water.
That's why you'd use a second price auction, or similar structure - accept a list of buy offers (price + quantity of shares), sort by price, and then choose bids in order until you've raised all the money you want to. Charge all bidders the price of the lowest offer that you satisfied. I don't think there would be a 40% pop if they'd sold shares initially like that.
The reason people use this system is that it enriches the banks that recommend which system to use.
> This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good.
>
All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left.
An auction of this sort actually incentivizes the buyers to underbid their valuation, in the hope of getting a bargain. With a single good to be bought, the game theoretically correct way to run the auction is to award the good to the highest bidder, at the second highest bidder's price [0]. It's more complicated for an auction of stock, but closer to what they actually do.
Most buyers in your ‘fair auction’ would disagree, as they would pay more than others per share. Because of that, many potential buyers would wait to see what price the market finds reasonable. End result is increased risk for the company going public.
In this example, I guess the bank handling the IPO talked to potential investors and then set what it thinks was a reasonable price, taking into account that, typically, the company doing the IPO wants the positive PR of a rising stock price. It seems they underestimated, as 40% is very steep.
What if instead, a giant silent auction occurred. All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left. This would maximize the income for the founders/investors and achieve a market rate that is fair and accurate.