New IPOs: Why Don't They Start Trading Immediately After the Market Opens?

Initial public offerings, or IPOs, is one acronym that almost every investors knows. This is when a private company, seeking to raise capital, becomes public by selling its shares on a stock exchange. The event provides an opportunity for investors to get in on a stock from the first day it hits the market.

Due to a history of some large IPO gains, many investors are driven by the potential. After all, imagine buying Amazon (AMZN) in May 1997 on its first day of trading at $18 per share. The stock is worth $3,475 today; if you had put $10,000 in Amazon then, it'd be worth just above $14 million as of this writing (calculation courtesy of dqydj.com).

But purchasing shares in an IPO is not easy. Shares are often reserved for large investors, such as banks and hedge funds. And for the little guys, the anticipation of the first trade can be nerve wracking. And that's because IPOs don’t often start trading immediately when the opening bell rings at 9:30am. Why is that?

On the day of an IPO, there’s often a lot going on – especially if a company and its underwriters have either overvalued or undervalued its shares. More recently, when Robinhood (HOOD), the most hyped IPO of the year, made its public debut at $38 per share on July 29, the stock didn't start trading immediately after the bell. It’s normal for a new stock to take an hour or more before it becomes available in regular trading. This prompted many questions on social media as to whether the stock was being delayed or was there a problem of some kind, but that was not the case here.

For Robinhood, which chose to trade on the Nasdaq, the exchange typically doesn't open up initial public offerings until a later in the trading session. Exchanges have their own IPO styles and processes they prefer to follow. Take Nasdaq for example, the exchange starts a process called the "IPO cross” on the morning that an IPO begins trading. During that time, traders can submit buy and sell orders. And in real-time, Nasdaq matches up those orders on its electronic marketplace -- this occurs in like a blink of an eye. Those orders can be entered into the system, but they aren't actually completed until the stock begins trading.

There’s also the role of the Designated Market Maker (DMM) which goes through a price discovery process using the open outcry method. The goal here is to determine a balanced price based on demand for the stock. The main goal of the DMM is to assess the level of demand for the stock versus the supply to determine the price discovery. When the DMM is ready, believing they have achieved a firm price, they signal to officially begin trading.

This is normal operating procedure for exchange operators. For lesser-known IPOs it's not big deal. But understandably, the process generates more questions when it's a more high-profile company like Robinhood. Exchange operators typically work with the company to decide when the stock should start trading. For that matter, the opening times for an IPO can vary as long as it's well before the closing bell at 4pm. Looking at recent Nasdaq IPOs, they have typically begun trading between a few minutes before 11am or just before 12pm.

There’s also the likelihood that the exchange wants to have an IPO stand alone at its own special time. So, the fact that HOOD stock didn’t immediately start trading when the opening bell sounds didn’t mean there was “a delay” or “a problem.” In this case, it was just a matter of style.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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