The Dutch Grey Market

When-issued trading concerns transactions in securities that have not yet been issued. This type of trade often takes place in a so-called ‘grey market’, in which all contracts are conditional on the issuance of the security. In this paper, we investigate the Dutch grey market for when-issued shares prior to stock splits and IPOs, using a unique, handcollected dataset. Stock splits are more likely to be preceded by when-issued trading when the underlying firm is larger, the relative trading volume of the stock is higher, and the stock return is less volatile. This implies that market makers are more likely to set up a when-issued market after a stock split announcement when the number of expected transactions is large and the expected costs are low. On the basis of when-issued and regular share closing prices, we calculate premiums of 0.50% to 1.50% on nearly all of the 50 trading days leading up to the stock split. When corrected for the time value of money, these when-issued securities trade at a small but economically significant premium of on average about 0.60% over the regular shares during a limited period before the effective date of the stock split. However, this when-issued premium disappears in the last days prior to the stock split. In the case of when-issued trading in the run-up to an IPO, we find that the prices paid in the grey market are in line with the first day closing prices. This confirms the findings of Löffler, Panther and Theissen (2005) that pre-IPO prices are highly informative.