The Pre-IPO Grey markets

I had started a project some months ago at ISB which aimed at understanding the Pre-IPO grey markets and their ability/ effectiveness in forecasting the listing prices. The project is complete at last and am sharing some interesting pieces of information which i found..

For the uninitiated, Grey Markets are actually over the counter markets where dealers may execute orders for preferred customers as well as provide support for a new issue, before the stock actually gets listed. So, these markets operate in the period between the announcement of an IPO and the actual listing.

As the name suggests, this is an illegal market and has been banned by SEBI. However trades in this market are still rampant and thousands of crores exchange hands. The grey market premiums are even quoted in many of the financial dailies and are easily available in many public forums on the net.

I had studied the time series data of the grey market premiums for 38 IPOs which came out in 2007. Some of the interesting stuff on these..

1. The correlation between the last quoted grey market price and the actual listing price is 0.9768 (a near perfect correlation). This suggests that, grey market’s ability to predict actual prices is great.

2. Not surprisingly, there is a definitive positive association between the percentage premium (in grey markets) and the subscription rates. Higher the premium quoted in the grey markets, greater seems to be the subscription rates or vice-versa. The correlation here was about 0.8095.

I am not going to bore you to death, giving the other findings here. However, I have concluded my paper stating - Stay away from these markets and don’t ever get into executing actual trades. Thousands of investors have burnt their fingers dealing in these markets.

Nevertheless, as intelligent investors use these grey market prices as one more additional data point in your analysis while evaluating an IPO. Grey markets seem to be great indicators of dumb IPOs..