Nasdaq Wants to Fast-Track Big IPOs. What Could Go Wrong?

When Nvidia went public in 1999, it took months to navigate the traditional listing process. Today, Nasdaq wants to change that math entirely—at least for the biggest players in the game.

The exchange has proposed a new "fast entry" rule that would allow large companies to bypass traditional waiting periods and join the Nasdaq index almost immediately after going public. Under current rules, newly listed companies must wait at least three months before being considered for index inclusion, a period designed to let markets assess their trading patterns and stability.

The Numbers Game

Here's what makes this proposal significant: Nasdaq handles roughly 50% of all US IPO activity, making it the primary venue for tech companies and growth stocks. The proposed rule would apply to companies with market capitalizations exceeding $10 billion at the time of listing—a threshold that would have captured major recent debuts like Airbnb, Snowflake, and Rivian.

The timing isn't coincidental. IPO markets have been volatile, with 2023 seeing the lowest IPO activity in decades before a modest recovery in 2024. Exchanges are competing aggressively for high-profile listings, with NYSE and Nasdaq each trying to attract the next generation of mega-cap companies.

Why Nasdaq Wants This

For Nasdaq, the calculus is straightforward: faster index inclusion means more immediate trading volume and higher fees. Index funds tracking Nasdaq indices would be forced to buy shares quickly after listing, potentially creating more predictable demand for new issues.

The proposal also addresses a practical problem. When large companies go public but can't immediately join indices, it creates a disconnect between their market importance and their representation in passive portfolios. Tesla, for instance, became one of the world's most valuable companies before joining the S&P 500, creating headaches for index fund managers.

The Institutional Perspective

For institutional investors, this rule change presents both opportunities and risks. On the positive side, faster index inclusion could reduce the volatility that often surrounds major IPOs in their first few months. Index buying would happen sooner, potentially stabilizing prices.

But there's a flip side. The three-month waiting period exists for good reasons—it allows markets to discover a company's true trading value without the artificial demand created by forced index buying. Eliminating this period could lead to more price distortion, not less.

BlackRock and Vanguard, which manage trillions in index funds, would be particularly affected. They'd need to buy large positions in newly public companies with less price discovery, potentially at inflated valuations.

Global Context

This proposal comes as exchanges worldwide are rethinking listing rules. London has relaxed requirements to attract more tech companies, while Hong Kong has introduced new structures for dual-class shares. The competition for high-profile listings has become a global arms race.

The regulatory environment adds another layer of complexity. The SEC has been scrutinizing market structure issues, from payment for order flow to the role of index funds in price discovery. A rule that could increase index funds' market impact might face regulatory pushback.