Series 79: 9.3.3.2. Penalty Bids

9.3.3.2. Penalty Bids

As mentioned previously, when an offering’s initial purchasers flip their shares, it can put downward price pressure on the new issue. One tool for reducing flipping is to avoid selling to known flippers during allocation. In addition, an AAU or selling group agreement will often give the managing underwriter the right to impose penalty bids on distribution participants whose customers flip shares.

When an investor flips a share, and the syndicate later engages in a syndicate covering transaction, the syndicate may wind up buying the flipped share. Because virtually every security has a unique identifying number, the managing underwriter will know when the syndicate is holding a flipped share. When this occurs, a managing underwriter with the power to impose penalty bids can take away the share’s selling concession from the distribution