Depository Trust Company IPO Tracking System

What Is the Depository Trust Company IPO Tracking System?

As its name suggests, the Depository Trust Company IPO Tracking System is a system, administered by the Depository Trust Company, that is designed to monitor the purchase and sale of securities that have recently been issued through an initial public offering (IPO).

One of the principal uses of the system is to identify instances were insiders have sold their shares shortly after the IPO. This practice, colloquially known as “flipping”, is often frowned upon by underwriters.

Key Takeaways

  • Depository Trust Company IPO Tracking System provides information on the purchase and sale of recently-listed securities.
  • It is helpful for underwriters who wish to monitor and respond to unauthorized flipping of IPO shares.
  • The system is also used a clearinghouse in other markets, such as corporate and municipal bonds.

How the Depository Trust Company IPO Tracking System Works

Although underwriters rely on some insiders selling their shares in order to make those shares available to retail investors, they also wish to avoid a situation where insider selling places downward pressure on the market price of the newly issued security. 

To maintain this balance, underwriters will often obtain commitments from their clients, who will pledge to not sell their shares within a specified timeframe. Importantly, these insiders may not be required to follow through on this pledge by any laws or regulations. Therefore, the underwriter may need to rely on their clients’ promises not to flip their shares following the IPO.

Lock-up Periods

Some IPO participants—such as the company’s executives, early investors, and founders—may be subject to explicit lock-up periods, during which they are prohibited by law from selling their shares. As a binding legal obligation, this restriction takes precedence over any informal pledges those investors may have made to their underwriters.

Thankfully, the Depository Trust Company IPO Tracking System provides a means for underwriters to verify whether these promises have in fact been kept. By monitoring all purchases and sales of securities that have been issued through a recent IPO, the tracking system allows underwriters to review reports of IPO-related share movements, thereby identifying which investors chose to flip their shares.

If an underwriter learns through the tracking system that a client broke their promise to not flip their shares, the underwriter may respond by not offering them an allotment to the next IPO. For this reason, clients who plan to flip their shares will usually let the underwriter know ahead of time, in order to not jeopardize future business.

Real World Example of the Depository Trust Company IPO Tracking System

Based in New York City, the Depository Trust Company IPO Tracking System is one of the world’s largest securities depositories. 

In addition to providing safekeeping through electronic recordkeeping of securities balances, it also acts as a clearinghouse to process and settle trades in the corporate and municipal bond markets.

Article Sources
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  1. DTCC. "The Depository Trust Company." Accessed Jan. 2, 2021.

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