Stabilization ... What is it? andh who is responsible for?

Normally, anyone caught trying to artificially move the price of a security on the secondary market is subject to regulatory problems, civil liability to other traders, and sometimes even criminal penalties.

If a few big traders of some small-company stock get together and come up with a plan to enter large buy orders at certain times throughout the day to boost the price, they are engaging in market manipulation.

On the other hand, right after a new offer of securities, the lead underwriter can prop up the price of the stock on the secondary market to some extent through stabilization.

 If the public offering price or POP is $10, but the stock starts trading on NASDAQ or NYSE for only $9.50, the managing/lead underwriter can place bids to buy the stock to provide a floor price for the investors nice enough to buy the IPO. Now, the bid can't be higher than the POP of $10, and it also can't be higher than the highest independent bid for the stock..

 That means the bid had better be bona-fide and cannot come from a subsidiary of the managing underwriter's firm, for example. If another market maker is quoting $9.50, the man¬aging underwriter can bid $9.50, but not $9.51. And, should the price rise to the public offering price again, no bids above the POP could be placed.

Since this is an unusual situation, stabilizing bids must be identified as stabilizing bids on the NASDAQ trading system. Before the managing underwriter enters any stabilizing bids, the firm must first submit a request to NASDAQ Market Watch to enter one-sided stabilizing bids. It is typically the managing underwriter who enters stabilizing bids, but whether it's that firm or another syndicate member, remember that only one firm can be placing stabilizing bids.

What if there is no independent market maker for the stock? 
Then, no stabilizing bids can be placed. The syndicate also must disclose any plans for stabilization in a legend (box of text) in the offering document that refers to disclosures in the "plan of distribution" section of the prospectus regarding stabilization activities.


Get in touch!


Email *

Message *