What is IPO Grey Market?
An IPO grey market is an Over the counter (OTC) market where select members can
place buy and sell orders for a stock pre-IPO. This is not a regular exchange but
an unofficial market which is used to gauge the premium at which the IPO is likely
to quote. The quotations of the IPO are in terms of premium or discount to the issue
The Concept of Grey Market Premium
There is some confusion between the grey market and the IPO market. The grey market
is an unofficial market where the demand and supply for an IPO is gauged and accordingly
it quotes at a premium or at a discount. There are large traders who purely trade
on the premiums on an IPO. The entire trade happens outside the ambit of the stock
exchange so you do not have any rights that you have when you trade on the stock
exchange. It is an unofficial market based on trust and is normally used to gauge
whether the IPO will list at a premium and by how much premium.
What Signals does the IPO Grey Market give?
Gauging IPO appetite
The IPO grey market is an indication of the appetite for the stock and can be broadly
indicative of the actual demand for the stock when it lists. Normally, the grey
market is used even by brokers and investment bankers to gauge how the actual IPO
will list and whether the premium over the listing price will sustain or not?
An unofficial market
IPO grey markets do not trade in actual IPO shares and they only trade in contracts
that are based on the IPO story as an underlying. To that extent they are exactly
like the unofficial forward markets that we used to have for most commodities. Money
flows in the grey market are largely unaccounted.
Most grey market contracts are purely based on slips of paper which are given to
you and there is no official contract or anything of that kind. It is a market that
is purely based on trust and that is why the market is kept closed and only select
persons are allowed to trade in that market. You can transaction in the grey market
unless you are an insider.
Useful price indicator
While the grey market is not an official market, various segments of the market
use it differently. For the issuer and the BRLM, it is an indication of the appetite
in the market and the strategy can be worked accordingly. Retail investors can decide
whether they should hold on to the stock or just exit on the day of listing itself.
Inherent risks in grey market
However, one needs to take grey market premiums with a pinch of salt. That is because
this market is not regulated by SEBI nor is there are any circuit filters in this
market. Hence there can be huge fluctuations and hence relying on the Grey market
beyond a point is not very wise. At best, one can take it as a rough indication
of the listing.
What You Need to Know About the Kostak
If you are familiar with the grey market, you will be familiar with the concept
of Kostak. What exacty is this Kostak all about?
Kostak is the local or colloquial term for the price of an application. The price
of application is the price at which you can sell the IPO shares even before it
lists. For example, if you have applied for 1000 shares and allotted 200 shares,
then your application value will be based on the likely premium for the 200 shares
You can unofficially exit at the Kostak price through your contacts in the grey
market. Remember, our word of caution here. This is an unofficial market and so
there is no SEBI authorization and there is no regulation. Any trades done by you
in the grey market are entirely at your own risk only.
Forces of demand and supply
The price of the Kostak is determined by the forces of demand and supply like in
any other unofficial market.