DEFINITION of 'Penalty Bid'

A bid, or offer to purchase securities, provided by a lead underwriter or other member of a syndicate as part of early IPO trading. The bid comes with the restrictions; if it is used, a penalty will be assessed to the broker offering the shares back to the underwriter. The penalty bid is created to deter investors from "flipping" IPO shares shortly after trading begins.

BREAKING DOWN 'Penalty Bid'

This penalty may be passed on from the broker to the client selling the IPO shares, but typically involves the broker returning some or all of the internal commission income back to the underwriting syndicate. At the very least, a broker whose client insists on selling shares back and incurring the penalty bid will not be pleased with the client, and will be unlikely to refer IPO shares back to that client in the future.

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