What Is Bid Support?
Bid support has a number of meanings within the financial sector, relating to both the pricing of financial instruments and a strategy involved in mergers and acquisitions. The uses of bid support can range from stock price manipulation to supporting a takeover bid during the acquisition of a company.
There are three common definitions for bid support in financial markets. In the first, bid support is a manipulative practice undertaken by an individual or group of traders to artificially prop up a company's stock price on the open market. It is also a process in which a substantial number of orders from different market makers come through on the bid side of a stock, giving the also impression of momentum. This can signal a trader to buy the stock who wouldn't otherwise, as it gives the impression that it is likely to rise. Finally, it can be a reference to services provided by accounting and consulting firms to companies making takeover bids for other firms.
- Bid support refers to strategies used in stock manipulation and in the world of corporate mergers and acquisitions.
- Stock prices are manipulated when either an individual or group of traders—or market makers—collectively boost a company's stock price by buying up multiple shares and therefore creating a false floor under the price.
- This practice gives the impression that the stock is experiencing momentum, which could bring in buyers who would have otherwise stayed on the sidelines or convince sellers to reconsider their strategy.
- Bid support also refers to the support given by accounting and consulting firms when a corporation is making a takeover bid for another corporation.
How Bid Support Works
Bid support can be used to describe market manipulation. In this context, the practice involves market participants making multiple bids on small amounts of a particular stock, with those bids being placed just below the highest bid price posted by market makers. This strategy has the effect of absorbing sell orders and creating an artificial floor for the stock while giving the impression that plenty of buyers are waiting in the wings.
Example of Bid Support Operation
Assume that the highest bid price posted by a market maker for a stock that has been heavily promoted is $1.75. The stock promoter then gets his cronies to place bids through different brokerage firms for a few hundred shares at $1.70, $1.65, and so on. This layering absorbs some of the selling pressure and prevents the stock from falling sharply, while the appearance of a number of bids placed through different firms gives sellers the impression that demand for the stock is much greater than it actually is. This may cause sellers and short-sellers of the stock to rethink their strategy and back away from attempts to drive down the stock.