A long wait, and then wild market swings: What to expect when Spotify goes public

Trader New York Stock Exchange

Spotify, the music streaming service, will list its shares on the NYSE Tuesday.
But experts say the first trade will be a volatile one and the pricing process could take hours.

Traders should expect the unexpected Tuesday when music-streaming service Spotify lists its shares on the New York Stock Exchange. The novel mechanism by which the company is going public, a direct listing, could translate into a volatile first day of trading which could take hours to get started.

As my colleague Joe Ciolli put it in this explainer, a direct listing is the stock trading equivalent of opening a store and hoping people will just stop in. As such, unlike an initial public offering, a direct listing doesn't involve underwriters, which in an IPO push a new stock to big investors and help figure out how much a stock should trade at when it first enters the market.

That leaves most of the price discovery work in direct listing to a firm's designated market maker. In Spotify's case, that is Citadel Securities.

The company plans to use the traditional indication process to evaluate the supply and demand before the first official trade. That involves looking at the orders coming in before the first trade to come up with an indicative price to gauge to further interest from the market.

"They iterate until they have a pretty good idea of what the buy and sell pressure is going to be when it starts trading," Shawn Cruz of TD Ameritrade told Business Insider. "The opening process will take a little longer."

How much longer? Cruz doesn't have a crystal ball. But he said most traders are expecting it to take at least an hour or longer.

Meaning that first trade might not take place until after noon. One industry insider said it definitely won't happen before 11 a.m. ET.

"If you are an investor and you want to participate in this, keep track of those indicative prices and keep track as things develop in the morning," they said.

But the uncertainty won't end after the first trade.

"If there's overwhelming amount of buying pressure, for instance, what you would run into is the market swinging widely," Cruz said.

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