Grey market definition

What is a grey market in trading?

By taking a position on a grey market, you’re taking a position on a company’s potential market cap ahead of its initial public offering (IPO). The price of a grey market is a prediction of what the company’s total market capitalisation will be at the end of its first trading day.

If you think the estimated value of the company is over- or under-priced, a grey market enables you to take advantage of this disparity before the shares are released publicly on the stock exchange.

Why are traders interested in grey market stocks?

Traders are interested in grey market stocks because it can be a way of taking advantage of movements in the company’s share price before it has actually listed.

Also, any activity is usually taken as an indicator for the direction the stock price will take once it has listed. The pre-market price can be used to gauge the demand for the shares.

How to trade grey market stocks

Grey market stocks are traded over-the-counter (OTC), which means that they are not offered by a stock exchange, but only by brokers and trading providers.

By taking a position on a grey market stock, you’re taking a position on a company’s potential market capitalisation ahead of its IPO. If you think that the company will be worth more than the price indicated, you can buy the market. If you think that the price is an overvaluation, you can sell.

When it comes to settling your trade, this can only be done once official trading of the share has begun. IG Bank calculates the settlement price based on the official closing price of stock on after first day of trading, as reported by Bloomberg.

Example of an IPO grey market

Prior to Twitter (TWTR) IPO in November 2013, the company generated large amounts of interest from investors, which was seen in IG Bank’s grey market for Twitter shares.

The day before the IPO, the speculative market implied that at the end of the first trading day, shares would be valued at $43.60 per share, giving it a market capitalisation of $23.75 billion. This was significantly higher than the company’s own valuation of $18 billion.

A day later, Twitter shares closed at $44.90 and gave the company an initial market capitalisation of approximately $31 billion.