Allocation
Also known as “circling,” the allocation process involves the determination of how to allocate the shares in the issue among investors who have submitted indications of interest during the book-building process. Some allocation decisions are relatively mechanical; for example, the lead underwriter must ensure that there are enough round-lot shareholders to meet the listing requirements of stock exchanges.
Allocation is particularly complex and sensitive in offerings that are oversubscribed, meaning the orders for shares exceed the actual number of shares available. Sensing the opportunity for a quick gain, investors may clamor for shares. An underwriter must rely on experience, intuition, and a sense of independence to allocate shares appropriately.
One key area to examine is institutional demand for the offering versus retail demand. In a “hot” IPO, institutions may inflate their orders, anticipating that they will not receive the full number of shares they request; a 10% order may be whittled down to a 3% order. In fact, the institution may not actually want its 10% orde