The SpaceX IPO dominated stock market news this week, as the AI and technology conglomerate raised $75 billion and $SPCX was to start trading on June 12.
The deal, with Anthropic and OpenAI apparently on deck, harkened back to the heady days of the late 1990s when internet IPOs were all the rage. Some market participants made a killing, others didn’t, but most everyone faced a reckoning when the dot-com bubble collapsed starting in 2000.
A quarter century later, the IPO allocation process, ie the primary market, isn’t much different, which is a remarkable dichotomy when juxtaposed with the secondary market.
Buoyed by technological advancement and regulators keen on marketplace competition, equities trading has advanced tremendously since the turn of the century, for both institutional and retail market participants. Bid-ask spreads are much tighter and trades happen much faster. Retail investors have institutional-grade trading tools at their fingertips, and they can buy and sell stocks and options on their phones, effectively in real time and with no commission.
Meanwhile with IPOs, the more things change, the more they stay the same. The closely watched SpaceX IPO allocated shares essentially the same way Red Hat did when it went public in August 1999 (though SpaceX is unlikely to match Red Hat’s 1,400% day-one gain).
Is the IPO share-allocation process antiquated? Don’t just take Traders Magazine’s word for it, here’s what AI had to say:
“The traditional IPO allocation process is widely considered antiquated because it relies on heavy institutional favoritism, arbitrary pricing methods, and manual broker lotteries. This creates artificial scarcity, leaving the vast majority of retail investors locked out of initial offering prices and forcing them to buy at inflated, post-listing valuations.”
It seems like the IPO allocation process is ripe for disruption, but that begs the question of why it hasn’t really been disrupted yet – after all, the technology is certainly there. There have been steps in the right direction, such as expanded retail access to IPOs, direct listings, and access to private, pre-IPO markets, but no wholesale changes.
Most likely, the status quo is being protected by the parties who benefit from it – the bank underwriters, the institutional investment firms, and the corporates that raise capital by selling shares. The process generally works for them, and regulators seem to be okay with it – so why change it?
Traders Magazine expects the IPO allocation process won’t change anytime soon, but another 25 years won’t go by without meaningful change.
