‘Very Silly’ Reference Prices Prove to Be Surprisingly Accurate

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Wall Street often grumbles about the unhelpfulness of so-called reference prices for direct listings like Coinbase Global Inc. It turns out they might not be so inaccurate, after all.

The night before Coinbase went public, New York Stock Exchange former president Thomas Farley echoed the complaints of traders about reference prices -- dollar figures assigned by stock exchanges to provide context around a direct listing’s price action.

“When the press articles tomorrow say ‘Coinbase pops 40pct above reference price!!!’ remember that the reference price is 100pct useless and was set artificially low so that headlines would say exactly this,” he wrote on Twitter. “Very silly.”

Farley, who is now chairman and CEO of blank-check company Far Peak Acquisition Corp., didn’t immediately respond to a request for further comment.

Farley is onto something. Unlike an IPO price, no shares change hands at the reference price, which is based on recent performance on private markets that are far less liquid than public exchanges.

Direct listings’ first-day pop from their reference price is almost identical to the average gain for initial public offerings.

Six major companies have conducted direct listings in New York since Spotify Technologies SA became the first in 2018. All six stocks finished their debut sessions above their reference prices -- 34% higher on average, according to calculations by Bloomberg News. By comparison, new stocks rose by an average of 36% from their offering price during their debuts.

While the average first-day move from a reference price is similar to the average first-day move from an IPO price, that only tells half the story. One in five of these IPOs fell from their offering price in their debuts, according to data compiled by Bloomberg, while a direct listing has never closed below its reference price in the same span.

With more than 250 IPOs priced over the past year -- excluding SPACs and deals that raised below $50 million -- the traditional route of going public has provided plenty of data for an exercise like this.

There have been far fewer direct listings, but another may be coming soon in Squarespace Inc. The web-hosting service is planning a direct listing for this year, Bloomberg has reported.

©2021 Bloomberg L.P.

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