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Alibaba IPO: A study in price transparency

Alibaba IPO
Adam Jeffery | CNBC

Alibaba (BABA) priced at $68, opened at $92.70, closed at $93.89. But the most interesting part of the process is the price discovery mechanism. How do you decide what price you should open at?

In the case of Alibaba, there was enormous demand right at the outset. In fact, there were essentially NO sellers at the initial price of $68.

The initial price indication was given a little after 9:50 a.m. ET: Roughly 25 million shares paired off (equal number of buyers and sellers) at $80-$83. Even at that price, there were bids for millions of shares more where there were no corresponding sellers.

How an IPO gets priced, step by step

What to do? Increase the price. The next two indications were stepped up in $3 intervals: $82-$85 and $84-$87. Then about 10:43 a.m., the indication began to tighten to a $2 band: $86-$88, and then the indications starting coming more frequently:

  • 10:53 a.m.: $87 - $89
  • 11:00 a.m.: $88 - $90
  • 11:05 a.m.: $89 - $91
  • 11:17 a.m.: $90 - $91
  • 11:24 a.m.: $91 - $92
  • 11:28 a.m.: $92 - $93

By the time of the final indication, there were only a few million shares that had not been paired off. This was a good indication that we were getting close to opening.

But the stock did not open until 11:53 a.m., when 48 million shares were sold at $92.70.

Why did it take 25 more minutes from the time of the last indication to open? Because there were buyers sitting around watching the action, with intention to buy, who didn't want to act until the last minute, for whatever reason. Their last-minute bids, put in just as the stock was ready to open, prolonged the process.

In other words, it's a dynamic process. It is changing while you are watching it.

It's a great study in Game Theory, the study of watching multiple agents all acting in their best interests and responding to incentives (lower price if you're a buyer, higher if you're a seller), while trying to anticipate what everyone else will do.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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