Twitter Follows No-Glitch NYSE

Technology stocks trade on NASDAQ, while Blue Chip stocks trade on the NYSE. This is a fact that most of us assume is the accepted truth. However, of late, the exchanges have been making inroads into the each other’s territory. Now it seems that the most popular tech IPO since Facebook (NASDAQ: FB) will happen on the NYSE.

NASDAQ’s systems have come under scrutiny in the last few months – a process that started with the ill-fated Facebook IPO. While it is undisputed that the price bands and the investment bank work executed by Morgan Stanley as lead broker (NYSE: MS) was fairly shoddy, it was a technical glitch that caused the Facebook fiasco. On the day of the IPO, more than 30,000 orders of FB were stuck in NASDAQ’s systems due to various technical issues. While these should have been executed—or cancelled—the NASDAQ management wanted to sort out matters before making a final call on cancellations. It is estimated that market makers lost more than $500 million for NASDAQ’s mistakes that day.

NASDAQ had to settle charges with the SEC for $10 million – for the technical glitch and the expensive decisions they took during the IPO. They have also created a $60+ million fund to take care of any similar charges in the coming years. But the FB IPO was not the last of the NASDAQ’s hiccups. Last month, on August 22nd, trading on NASDAQ was halted for more than three hours, while earlier this month, on September 4th, the market did not move for six minutes.

Twitter is expected to sell 50 to 55 million shares at a price range of $28 to $30 per share. This will value the company around $15 billion, which is significantly less than Facebook’s IPO valuation of $100 billion. Nonetheless, to avoid any potential controversy similar to the one that arose for Facebook, early reports suggest that Twitter is strongly leaning towards the NYSE.

Where is the trade in this news? A quick look at Ernst and Young’s (E&Y) recently released Global IPO Outlook will inform the discerning investor that the global IPO market is heating up. After a few dismal years, when the credit and equity markets all but shut down – and earnings for exchanges took a large hit – the times are changing.

NYSE Euronext (NYSE: NYX) owns NYSE, the Big Board, ARCA in the US and equities and derivatives exchanges across Europe through its Euronext acquisition. According to E&Y, volume of US IPOs in 2013 has already surpassed 2012 and six of the largest ten were in the US.

To the end of Q3 2013, US exchanges are projected to raise US$11.8b from 65 IPOs, accounting for 33% globally in terms of number of deals and 49% by capital raised. Health care is likely to be the most active sector by number of deals and rank second by capital raised (21 IPOs, which raise US$2.4b). Technology the second most active by deal numbers and third by capital raised (12 IPOs, US$1.4b). Energy will be the most active sector by proceeds and third by deal number (9 IPOs, US$3.4b) – E&Y

NYSE-EuronextNYSE is trading at $41.84, down more than 50% from its all-time highs. The stock shows an upward trend and we believe that in the coming months, as more of the positive news on IPOs hit the market there should be a trade here. The European markets of NYSE – primarily London and Paris are outperforming rest of Europe; and the US will continue to be the global IPO powerhouse. Trading at a 23.66 PE, NYX is not cheap – but strengthening fundamentals can lead to a sharp, unexpected spike in earnings in 2013 and 2014. Their arch-rivals, The Nasdaq OMX Group (NASDAQ: NDAQ) is trading at $32.18 and a lower multiple of 18 PE.

Analyzing the data from E&Y and the current trend of even technology stocks getting weary of Nasdaq’s glitches, we can see a performance disparity between these large, global exchanges. Among the top-three sectors by IPO value, we do not see too many Energy or Health Care stocks getting listed in Nasdaq, while we see Twitter’s plans on getting listed in the NYSE. In July, Oracle (NYSE: ORCL) moved from Nasdaq to NYSE. We will keep a close watch on this trend as the drama of the exchanges unfolds – but we expect NYSE to surprise the markets on the upside.

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