Stabilizing Bids and Penalty Bids
When the price of a new issue rises after a public offering, it is good for both the underwriter and the issuer. It indicates that the underwriter was successful at marketing and pricing the issue. It also shows that the public believes in the future success of the issuer. If the price of a security falls, it indicates the opposite. For this reason, the underwriter has an interest in trying to stabilize the price of the issue if it begins to fall.
A stabilizing bid is a bid made for shares of an IPO by the underwriters in an effort to prevent the price of the new issue from falling during the offering. Typically, a stabilizing bid is placed by the lead underwriter.
Stabilizing bids are allowed to be made by the underwriters and must adhere to the following rules:
- • Stabilization is only allowed for firm commitment underwritings.
- • A stabilizing bid may not be placed at a price that is higher than the lower of two figures: the offering price for the security and the previous stabilizing bid (initial stabilizing bids may not be greater than the lower of the offering price and the highest independent bid).
- • A stabili
