Pre-IPO trading: Giving investors a choice
Securities are usually traded on exchanges, which may be through official trading, on the Regulated Market, or on the Open Market (Freiverkehr). This exchange trading is generally handled by banks acting as brokers. In addition to this exchange trading, there is also considerable trading directly among banks, known as “telephone trading”, which may be in shares, warrants, bonds or various other kinds of securities. Like most banks in Germany and elsewhere, SCHNIGGE is an active participate in this off-exchange trading. It is in this off-exchange market that SCHNIGGE has, since its inception in Germany, been a leader in pre-IPO or “grey market” trading.
Pre-IPO trading as an alternative to IPO subscription
Private investors who wish to participate in a forthcoming initial public offering (IPO) through pre-IPO trading should contact their own bank, which will then execute the necessary telephone trade with SCHNIGGE.
It must be understood that, unlike a direct subscription for shares being offered in an IPO, a pre-IPO trade is a conditional forward contract on a "when issued" basis under which the shares are delivered upon their first day of regular exchange trading. It is “conditional” in the sense that there are, under the Special and Additional Conditions for Pre-IPO Trading (only available in German), certain specific conditions under which the delivery contract is voided. It is important for any investor participating in pre-IPO trading, whether a professional trader or a private individual, to understand these special conditions.
In the future, this pre-IPO or “when issued” trading with selected banks will also be possible by way of the internet, through SCHNIGGE Guarantee Trading.
Pre-IPO trading is, of course, also of relevance to issuers who are bringing their shares to the market for the first time. If you are a company and would like to know more about IPOs or securities issuance, please click here.
Prices for pre-IPO or “when issued” trading are published on this website as well as by way of financial information services, videotext and the financial press:
- Reuters on page <SCHNIGGE01>
Some remarks about the pre-IPO market and pre-IPO prices
The pre-IPO market makes it possible for an investor who wishes to acquire shares in a newly listed company to immediate purchase them (subject to delivery conditions) at the current market price, without the uncertainty of directly subscribing in the IPO and not knowing whether one will actually be allocated shares. It also offers benefits to sellers, enabling holders of existing shares, or those who have been allocated shares in the IPO, to sell these at the current market price, particularly if they fear that the price may go down.
Looking at pre-IPO trading from the standpoint of the issuer, it likewise offers benefits in that it enables issuers and their underwriting banks to measure market interest in the new shares.
Additionally, it serves to relieve initial selling pressure on the newly issued shares because when exchange trading of the IPO begins, these shares must often quickly find their way into stronger, more committed hands. In SCHNIGGE’s experience, pre-IPO trading may be as much as 10 to 20 per cent of the issue size. To the extent that this trading puts the “when issued” shares into the hands of longer-term investors who do not seek to immediately sell the shares, this may serve the interests of the issuer and the underwriting banks by reducing this initial selling pressure.
Additional considerations for private investors
Over past years, interest among German retail investors has grown in share investing, in IPOs – and in participation in this off-exchange, pre-IPO trading. This was fuelled by several highly promoted IPOs, particularly that of Deutsche Telekom.
It should be noted that your bank may not permit you, as a private investor, to participate in pre-IPO trading because of the very low risk profile which they have assigned to you. If you feel that your bank has acted incorrectly, it is your right to complain to your bank and request them to adjust your risk profile, or even to move your account to a different bank.
That being said, you must understand that your bank may require a minimum order size or a minimum fee, as this transaction must be processed manually and this off-exchange, "telephone trading", as well as the subsequent manual transaction settlement, involves a certain amount of time and effort.
It is also generally possible to place these as limit orders, although any such orders should involve a minimum of 100 shares or EUR 5,000.
All major banks in Germany now participate regularly in this pre-IPO trading.
Commencement of pre-IPO trading
SCHNIGGE can begin pre-IPO trading only when the bookbuilding spread or fixed price for the share offering has been set. Through consultation with market participants, SCHNIGGE forms its own opinion with regards to the forthcoming issue before announcing its initial quotation.
At this point, the market can react with buy or sell orders. Within a short time (generally 10 to 30 minutes), this order book produces the first trading prices, which are then published through the above-mentioned channels. It is possible that the initial quotation proves, in retrospect, to have been too high or too low, and this is something that we too can only know after the fact
As to the traded prices during pre-IPO trading, our experience is that approx. 80% of all IPOs for which we offer pre-IPO trading, the price at the start of post-IPO exchange trading falls within the final price range of pre-IPO trading. This shows that this “grey market” provides prices which not only open interesting opportunities but also serve as a strong gauge of market interest. By the same token, shares which do not find buyers in pre-IPO trading are unlikely to attract much buying interest following the IPO.
We welcome more participants in the pre-IPO market, as the larger our order book, the tighter we are able to make our quote spreads.
SCHNIGGE does not offer investment advice on these transactions, firstly because we do not have the research documents in place which this would require, and secondly because we generally do not have a bank relationship with the issuer. Our aim is to be a market maker, holding a neutral position between buyers and sellers and trying to match the highest possible number of orders.
Delivery of shares
Buyers in pre-IPO trading often ask, “Where will I get my shares? Who do they come from?” In many cases, they are from holders of existing shares in the company, who wish to take advantage of prices in pre-IPO trading which they view to be favourable. Additionally, foreign banks often have binding commitments for a certain allocation of shares, which they may find advantageous to sell in the pre-IPO market, thus locking in their profit margin. These shares could also be sold by the trader in a bank, who believes that he or she can buy them back after the IPO at a lower price. “When issued” trading is a common practice, and in our own long experience with pre-IPO trading, we have never known a case of failed settlement, i.e. failure to fulfil delivery of the shares
If you are a private investor and wish to participate in pre-IPO trading, which involves risks as well as opportunities, please contact your own bank, which will place your order with us on your behalf. If your banking relationship is with a branch office, the branch will generally need to forward your order to the central offices of the bank or bank group, as SCHNIGGE may only trade with other banks which are also exchange members.
Finally, we would like to emphasize that pre-IPO trading, if used with discretion, allows both buyers and sellers to benefit – sellers by locking in their profit margin, and buyers by having certainty that they will receive IPO shares at a known and favourable price. Although our experience is that these objectives are indeed met most of the time, one must recognise that pre-IPO trading involves not only opportunities but also risks.
The above description was prepared as a broad overview intended primarily for private investors. It may be used or reproduced by third parties provide that the source is properly attributed to SCHNIGGE Wertpapierhandelsbank SE.