How Hot Is the Twitter IPO?

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Nov. 4 (Bloomberg) -- University of Florida Professor of Finance Jay Ritter discusses the Twitter IPO with Stephanie Ruhle on Bloomberg Television's "Market Makers." (Source: Bloomberg)


Cory was talking about some disconcerting information, doesn't even matter -- does it even matter?

A hot ipo, is a hot ipo.

You have a combination of investors.

Some are just planning on renting the stock and making a quick but with no intention of being a holding investor.

There have to be some investors that plan on buying and holding at some valuation.

Some investors buy and hold, the question is is there any way of knowing, either on the basis of financials coming out of the underwriters how many of them are going to be flippers and how many of them will hold?

That is a big problem, and a concern for short-term investors.

When facebook went public a year and a half ago, the underwriters did not guest write about how many of the is the additional buyers would immediately flip the stock, consequently the aftermarket demand was a lot less strong than they expected.

When we look at allocations after this, are we going to see less going to retail hedge funds?

A lot of the stock is going to be going to hedge funds.

The incentives of the underwriters are not well aligned with twitter.

Hold on.

Walk us through that.

The incentives of the underwriters are not aligned with twitter?

Wouldn't you want -- blackrock is a huge client, why would you not want to give them the money?

They gave a lot of the excessive commissions to underwriters, and as a result of being such profitable customers, they get first right wording for getting high ipo shares.

As long as they are profitable customers, hedge funds can flip the stock with impunity.

You think hedge funds get referential treatment over real money clients when it comes to how the underwriters decide what the valuation is?

It is a commendation of allocations to individuals -- but if the underwriters were really concerned about it, you would see a lot more shares being allocated to pension funds and index cards -- funds.

What is not be unethical if the underwriter was giving a disproportionate allocation because they knew -- they brought a second or business -- secondary business with them?

Underwriters are aware that this is a very sensitive topic.

They are very unwilling to publicly admit to how profitable a customer you are affects the ipo allocation.

This is where the incentive of twitter and the underwriters are not well aligned.

Twitter benefits from getting more proceeds in the sale, while the underwriters, while they benefit from more proceeds, they are also benefiting, leaving money on the table and hedge funds and other institutional clients are willing to pay more on other trades in order to get that referential treatment -- preferential treatment.

A fine line to walk.

This text has been automatically generated. It may not be 100% accurate.


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