WHAT IS GREY MARKET?
It is an over the counter or parallel market where IPOs are traded on mutual trust before actual listing on the stock exchange. These are not regulated by anyone as SEBI and stock exchange are not involved and do not pay any role in the grey market, this is why trust is a very significant component in the grey market. There is no certain relation between the grey market and the actual stock market.
Grey market can be classified into 2 parts on the basis of trading:
- Trading of IPO application before allocation at a discounted or premium rate.
- Trading allocated IPO shares after the allocation but before the listing on stock exchange at a discount or premium rate.
PRICE REGULATION IN GREY MARKET
Various factors like the interest of retail traders, how much oversubscribed the IPO is, institutional traders, who the promoters are and who are the underwrites, etc drive the piercing of IPOs in the grey market as there are no specific compliances and rules for it.
If the rate of IPO shares or IPO application is trading at a lower or discounted price than the bid price in the grey market, then it is said that the IPO is being traded at a grey market discount.
If the rate of IPO shares or IPO application is trading at a price higher than the bid price in the grey market, then it is said that the IPO is being traded at a grey market premium.
WORKING AND RISK
Grey market is a small group of investors who indulge in the unofficial trading of IPO (Application and allotted) shares. They trade on the basis of mutual trust. As said earlier, This trading is not governed or supervised by EBI or stock exchange. No actual selling or buying of shares takes place as this is unofficial trading, it is generally conducted via telephone or on a slip of paper.
Talking about the risk component, trading in the grey market is surely very risky. There is always a counterparty risk while buying and selling shares in the grey market. The trailers are not regulated and no party exists for the clearance of the trade. This is the reason brokerage firms and regulators often demotivate investors to trade in the IPO grey market.
The IPO grey market can be used as an indicator for investors to understand the appetite and behaviour of the IPO. This can assist them to decide where the actual price of the stock will head after listing on the stock exchange. These assumptions can be used to make an investment decision in a particular IPO or not.