What is Grey Market?
In the usual parlance, an IPO grey market meaning is where goods are being manufactured with the consent of the owner, However, a part of it is being sold outside the usual distribution channels which can be legal.
In the market for securities, a grey market is where a company’s shares are being traded even before the IPO has been issued.
The grey market pertaining to securities is similar to an over the counter market where dealers and brokers trade with investors on shares which are yet to be issued.
The IPO grey market is an unofficial market and has no whatsoever relationship with the IPO market.
We are already aware of what an IPO is. It is the Initial Public Offer floated by a privately held company, who now wishes to collect public money.
In lay man’s terms, it is the first sale of shares of a privately owned company.
The IPO Grey market is not Regulated by the SEBI.
However, that does not mean all is bleak. For retailers, the Grey market is the place to gauge the mood of the market about the yet to be released IPO.
One can get to know what the performance of the IPO can be once it is issued.
For High Net Income clients, it is a barometer of the strength of the share. Based on this analysis they may decide on their investments about the IPO.
For financiers who are financing the IPO, it is a trailer. They would understand the pros and cons of financing a particular IPO.
The IPO grey market is a source of information as well as a forecasting soundboard.
As stated earlier, the Grey market is outside the purview of SEBI. Any trade that happens here is done without the authorisation of the apex trade watchdog.
Hence, one has to be careful while dealing in the grey market. Price fluctuations are a great concern since there are no price filters in the IPO Grey market.
The other thing that investors and traders have to be wary off, is that unlike exchange trading norms, the IPO Grey market is not a guaranteed place.
For exchange-traded transactions, the counterparty is the clearing corporation itself. However, in the IPO Grey market, there is a high possibility of a default by the party, one is trading with.
Hence, once can even suggest that the IPO Grey market acts as a forward market.
This is the reason why SEBI advises its members not to trade in it since the returns are not guaranteed.
The ideal way to get to know more about the grey market is to get in touch with the brokers. They are the best guide when it comes to negotiating the perils of trading in an unregulated environment
Grey Market Premium
A grey market premium is a price the brokers are willing to pay over and above the price of the IPO.
New IPO or latest ipo grey market premium can vary from broker to broker. Since it is not a regulated market, no price will be the same. However, by looking at the price range, the market mood can be gauged.
For seasoned traders, analysing the response of the market before the launch of the IPO is an important task.
The grey market price is never a fixed one. Since there are no market filters, the prices may fluctuate in extremes.
BSE and the Grey market
The IPO grey market in Mumbai went abuzz with speculation, when BSE had announced in 2016 it would offload 30% of its total stake by end of 2017. BSE price of shares in the grey market surged like a literal wave, as it moved towards offering an Initial Public Offer (IPO).
The IPO grey market is a fertile ground for traders willing to hear the pulse of the trading community.
However, its use should only be limited to analysis of upcoming IPOs and not transactional, since, it is unregulated, prices can be highly manipulated.
How does the IPO Grey market work?
The IPO grey market is unregulated. Hence, it cannot issue shares. The entire transaction is based on trust.
There is a group of people, small in number, who throw up the bids and offers for the IPO shares. These bids and offers are made at different prices.
Traders and investors alike bid for the same but through a slip of paper. The primary premise of the IPO Grey market is trust.
The IPO Grey market is considered to be an unofficial market. This is the reason why the chunk of the trade is carried over the telephone.
Traders start bidding for a new IPO on factors like appetite of company, retail strength, how much oversubscribed it would be, how reputed the promoters are etc. This is done even before the company has listed its stock.
The IPO grey market functions by the principle of demand and supply.
How can an Investor Benefit from the IPO Grey market?
The IPO Grey market is a closed market. It functions beyond the purview of SEBI. Hence, whatever happens here will not be authorised, though it is not illegal for the grey market to function.
For investors, willing to make a killing in the IPO Grey market, the going may get dicey, if not much understanding has been made of it.
The prices in such an unregulated market cannot just fluctuate but be manipulated too. So one either makes money or loses it all, there is no middle ground.
However, it is still a place with a lot of takeaways.
IPO Grey markets a veritable treasure for advance information.
One can get to know the success percentage of a yet to be listed IPO, much before it is floated on the boards.
For those wanting to make money out of this, the ear should always on the ground.
The IPO grey market is an unregulated, closed market, plying on speculative bidding and offers. Being outside the purview of SEBI, it does not provide any guarantee regarding the pricing of the bids.
It is a market that does not provide real shares to traders and investors. The premise of the contract is trust and a slip of paper.
Most of the business is done over the phone.
However, it is a great place to understand the standing of an IPO. IPO Grey markets are educative in that sense. If one has to acquire advance knowledge of an upcoming IPO, this is the place to be.
Also, for IPO financiers, this will be a place where they will be able to gauge the mood of the market. These are required intelligence to further the cause for greater financing or taking a step back.
IPO Grey Market FAQs
Q1: What is an IPO Grey market?
In the market for securities, the IPO grey market is where a company’s shares are being traded even before the IPO has been issued.
Q2: Is the IPO Grey Market legal?
It is a legal entity, though it is unregulated and a closed market.
Q3: Is the Grey market authorized to trade?
There is no authorized body that governs the IPO Grey market. It is an unofficial market, which is outside the purview of SEBI.
Q4: How does the IPO Grey market function?
It is run a small group of traders and brokers who do the bidding and provide the offers. The premise of trade in the grey market is mutual trust and the contract is a slip of paper. Most of the business runs through the phone.
Q5: Is trading in the IPO grey market safe?
SEBI advises its members to avoid the grey market since it is not regulated. Because of the lack of it, there are possibilities of default by the counterparty. Also, since the market does have price filters, extreme pricing occurs. Also, the price can be manipulated. That said, the grey market is a great place to gauge the market’s mood regarding IPOs and their success post listing.