Stabilizing Bid

What Is a Stabilizing Bid?

A stabilizing bid is a purchase of stock by underwriters to stabilize or support the secondary market price of a security immediately following an initial public offering (IPO). After an IPO, the price of the newly issued shares may falter or be shaky in trading.

Key Takeaways

  • A stabilizing bid is a purchase of stock by underwriters to stabilize or support the secondary market price of a security immediately following an initial public offering (IPO).
  • A stabilizing bid helps to make sure that the trading price of a company's share does not fall below its IPO price, which is crucial for a company that doesn't want to risk a negative perception after going public.
  • Making a stabilizing bid involves buying back shares that were oversold or shorted in an effort to create an extra source of demand for newly-issued shares and stabilize the stock price.
  • Stabilizing bids are only a temporary solution, as eventually, the market will determine the stock's price.

How a Stabilizing Bid Works

After a company has made the decision to go public and conduct an IPO, it will vet a number of underwriters for expertise in valuing the company's equity, helping with marketing and distribution, conducting sell-side research support, and coordinating trading functions.

Once the IPO price has been set by the underwriter, and the issuer's shares make their debut in the public, it is in the best interest of the issuer that the shares are well-received. This translates to a higher stock price upon release into the market.

The stabilization bid helps to make sure that the trading price does not fall below the IPO price, which is crucial for a company that doesn't want to risk a negative perception after going public.

To prepare for this risk, a company may grant the underwriters a greenshoe option—also known as an overallotment option—that allows the underwriters to oversell or short-sell up to 15% more shares than initially offered by the company.

If the price wavers shortly after the stocks are issued and demand is weak, the underwriters will step in and make a stabilizing bid. This involves buying back the shorted shares. Creating this extra source of demand for the newly issued shares helps to stabilize the stock price, keeping it above, or at least around its issue price.

Example of a Stabilizing Bid

Company ABC went public at a price of $15 per share. The underwriters had initially indicated a range of $20 to $23 per share in the weeks leading up to the IPO. This was a clear indicator that demand would not be as strong as the company had hoped. Company ABC sold 20 million shares to the underwriters, but with the 12% over-allotment, the underwriters sold 22.4 million shares to investors. This left the underwriters short 2.4 million shares.

The underwriters then stepped in with a stabilizing bid, buying back shorted shares. This helped stabilize the stock price at $15.

Without the stabilizing bid, the stock may very well have closed below the IPO price that day, resulting in bad optics for the company as well as the underwriters; however, stabilizing bids have a finite lifespan and the market will then determine the price. For example, at the end of the trading week, Company ABC's stock price fell to $12 a share.

Who Places the Stabilizing Bid?

In an IPO, the lead underwriter places the stabilizing bid by purchasing shorted shares of the stock in order to create demand and keep the share price from falling. This is done when the demand for the shares of an IPO is less than expected.

How Do Underwriters Stabilize a Stock's Price?

In an IPO, underwriters stabilize the price of a stock by purchasing its shares in the secondary market. The shares are typically purchased at the offer price, where this increased demand from the underwriters prevents the stock's price from falling. The shares that are bought are those that were purchased in the IPO and immediately sold.

How Many Stabilizing Bids Are Allowed?

Only one stabilizing bid at the same price at the same time in any market is allowed.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Section VIII.A.3. Current Disclosure, Legal and Processing Issues—Disclosure, Legal and Processing Issues—Syndicate Short Sales."

  2. FINRA. "SEC to Approve Amendments To NASD Rules To Facilitate Compliance With SEC Regulation M."

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