Twitter IPO: ‘Grey market’ indicates appetite high

Catherine Boyle and Leslie Shaffer
Tuesday, 17 Sep 2013 | 3:31 AM ET
Yasuyoshi Chiba | AFP | Getty Images

Twitter's initial public offering (IPO) is generating high levels of interest among traders in the so-called grey market, where a company's shares are traded before their official listing,

But that's no guarantee it'll avoid repeating Facebook's infamous first-day flop.

Twitter, which announced plans for its high-profile IPO in a tweet last week, is expected to raise around $10 billion, but early trading in derivatives linked to the shares suggests its valuation could be as high as $13.15 billion.

The "grey market" can be a good gauge of appetite for a company's shares before they are launched on the stock market, and usually consists of contracts for difference (CFDs), derivatives which pay out based on how close they come to the final figure.

Traders are buying CFDs in Twitter with a $15.04 billion to $16.04 billion valuation spread from spreadbetters ETX Capital, who reported "high levels" of buying interest.

(Read more: Saudi prince to hold on to Twitter stake)

Twitter's high-profile IPO was announced in a tweet last week and is the most hotly anticipated since Facebook, the last major social network to launch itself on the market. Investors and analysts are keen that the company learns from Facebook's disappointing IPO in May 2012, where the company's shares lost half their value following their launch.

The keen interest in Twitter CFDs currently may not be a totally reliable indicator for the social media site's share listing.

Rival player Facebook had the "busiest grey market," said David Jones, chief market strategist at IG. He noted Facebook's market capitalization was estimated at $70 billion before its listing, while its grey-market CFD trading indicated it would open around $100 billion.

Can the grey market correctly value Twitter?
David Jones, chief market strategist at IG, talks about the upcoming Twitter IPO as the expected market cap on the grey market has risen to over $15 billion.

In an infamous first day flop plagued by technical glitches, Facebook's shares climbed as high as $45 a share, but the price wobbled and it closed the first day of trade at $38.23. Over the months ahead, the stock slid to as low as $18.03 a share, and it took around 15 months to regain its IPO price.

(Read more: Is chirping the new tweeting?)

Other social media stocks have performed better. LinkedIn has soared to almost $250 a share from its $45 offering price in May 2011. Yelp is up 325 percent since its March 2012 IPO, although Groupon is down more than 41 percent since it went public in November 2011.

CFDs themselves are controversial because they allow investors to bet on markets using high amounts of leverage and without owning the underlying asset. They are banned in the U.S. Countries like the U.K. and Australia have brought in new rules on CFD trading in recent years.

There are also concerns about Twitter itself. Although it has around 240 million active users – accounts which use the social network more than once a month – the New York Times has reported that there is a thriving market for fake twitter followers and retweets.

Follow Catherine on Twitter: @cboylecnbc and Leslie Shaffer at @LeslieShaffer1

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