Stabilizing Activities and Syndicate Short Positions

New offerings can be volatile. Supply and demand imbalances and market factors can cause prices for newly issued securities to fluctuate. The syndicate, and particularly the lead manager, can play an important role in stabilizing the market price for a new offering. Because of this ability to influence pricing, however, stabilizing activity is heavily regulated and may be undertaken only in certain circumstances and under certain conditions.

When the price of a security is declining in the aftermarket, the lead manager, or another member of the syndicate that has been given stabilization authority, may make a stabilizing bid. Stabilizing purchases are intended to create enough short-term demand to prevent or arrest the price decline. They may not be used to inflate the price of a security above the market price.

The practice of “flipping,” in which a customer immediately resells its allocation of shares in an offering, can put downward price pressure on a newly issued security. To address this problem, the AAU often includes a penalty clause, which allows the lead manager to impose a penalty bid against syndicate members when one of the member’s customers flips shares. The “penalty” is that the member forfeits its concession. The possibility of a penalty bid acts as an incentive for syndicate and selling group members to avoid allocating shares to potential flippers. Penalty bids cannot be assessed on an associated person or a broker-dealer unless the managing underwriter has assessed a penalty bid on the entire syndicate. The “bid” occurs when the lead manager purchases the flipped shares in a syndicate covering transaction.

A syndicate covering transaction is a bid or purchase made on behalf of the syndicate to reduce a syndicate short position, which is created when the lead manager sells more securities than the syndicate’s firm commitment. A syndicate short position may be cove