Since brokers make money by trading, why restrict on IPO trading?
Since brokers make money by trading, why restrict on IPO trading?
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puzzled · External communityPost link
External question — Personal Finance Stack Exchange
Author: puzzled
Original post: https://money.stackexchange.com/questions/169714
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I see some brokerage restrict 30 days and some 15 days with Anti-Flipping Policy. If these customer do not do trading for 15-30 days, won't these brokers lose money? What do these brokers gain by restricting trading? Some authors said:
They consider what they feel to be the most beneficial to their business.
I am not denying above and not asking for fairness, but trying to understand, does the issuer of the IPO pay these brokers directly or indirectly?
flipping :
https://www.morningstar.com/news/marketwatch/20260611140/want-to-flip-spacexs-stock-on-the-day-of-the-ipo-be-prepared-to-pay-the-price
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Franck Dernoncourt · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Franck Dernoncourt
Original post: https://money.stackexchange.com/a/169716
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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TLDR: Customers flipping their IPO shares may cause brokers to lose the commissions they get from the IPO underwriter.
Details: When a company IPOs, underwriters buy the shares from the company at a discount to the offer price. That discount is called "gross spread", aka underwriting spread or gross underwriting spread. It is historically ~7% for traditional IPOs, and much thinner for large deals like SpaceX (in fact for SpaceX I recall someone on some financial YouTube channel joking that the underwriter should pay SpaceX given than SpaceX is so famous ☺). The spread is split three ways:
a management fee
an underwriting fee
the selling concession.
The selling concession is typically the largest slice, often ~60% of the spread. The concession goes to whoever actually places the shares with end buyers (e.g., the retail investor with a regular Fidelity brokerage account). So when your broker hands you IPO shares, it earns the concession on them. The issuer never writes your broker a check; the concession is carved out of the spread, which is deducted from what the issuer receives. The issuer pays the spread; the concession flows down to the placing broker.
The underwriters want the stock to trade well in the aftermarket and not crater below the offer price. Flipping creates selling pressure that works against that. To enforce discipline, underwriters use a penalty bid: if a broker's allocated shares get flipped, the lead underwriter can claw back the selling concession from that broker on those shares. So if your broker's customers flip, your broker loses the concession it already earned. That's a direct financial hit, and it dwarfs any trading commission (which is roughly zero anyway, see below).
Source from
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5131
:
(c) Policies Concerning Flipping
(1) No member or person associated with a member may directly or indirectly recoup, or attempt to recoup, any portion of a commission or credit paid or awarded to an associated person for selling shares of a new issue that are subsequently flipped by a customer, unless the managing underwriter has assessed a penalty bid on the entire syndicate.
(2) In addition to any obligation to maintain records relating to penalty bids under SEA Rule 17a-2(c)(1), a member shall promptly record and maintain information regarding any penalties or disincentives assessed on its associated persons in connection with a penalty bid.
Side note regarding:
Since brokers make money by trading
Note that modern US retail brokerages mostly don't make money from stock trading commissions. Schwab, Fidelity, Robinhood, SoFi, and E-Trade all charge 0 USD for stock trades. Their revenue comes from net interest on cash balances, margin lending, securities lending, payment for order flow (Robinhood especially), premium subscriptions, etc.
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Quoted from Forex.com.bd-Editorial External answer — Personal Finance Stack Exchange Author: Franck Dernoncourt Source score (net votes, not local likes): 4 Original post: https://money.stackexchange.com/a/169716 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. TLDR: Customers flipping their IPO shares may cause brokers to lose the commissions they get from the IPO underwriter. Details: When a company IPOs, underwriters buy the shares from the company at a discount to the offer price. That discount is called "gross spread", aka underwriting spread or gross underwriting spread. It is historically ~7% for traditional IPOs, and much thinner for large deals like SpaceX (in fact for SpaceX I recall someone on some financial YouTube channel joking that the underwriter should pay SpaceX given than SpaceX is so famous ☺). The spread is split three ways: a management fee an underwriting fee the selling concession. The selling concession is typically the largest slice, often ~60% of the spread. The concession goes to whoever actually places the shares with end buyers (e.g., the retail investor with a regular Fidelity brokerage account). So when your broker hands you IPO shares, it earns the concession on them. The issuer never writes your broker a check; the concession is carved out of the spread, which is deducted from what the issuer receives. The issuer pays the spread; the concession flows down to the placing broker. The underwriters want the stock to trade well in the aftermarket and not crater below the offer price. Flipping creates selling pressure that works against that. To enforce discipline, underwriters use a penalty bid: if a broker's allocated shares get flipped, the lead underwriter can claw back the selling concession from that broker on those shares. So if your broker's customers flip, your broker loses the concession it already earned. That's a direct financial hit, and it dwarfs any trading commission (which is roughly zero anyway, see below). Source from https://www.finra.org/rules-guidance/rulebooks/finra-rules/5131 : (c) Policies Concerning Flipping (1) No member or person associated with a member may directly or indirectly recoup, or attempt to recoup, any portion of a commission or credit paid or awarded to an associated person for selling shares of a new issue that are subsequently flipped by a customer, unless the managing underwriter has assessed a penalty bid on the entire syndicate. (2) In addition to any obligation to maintain records relating to penalty bids under SEA Rule 17a-2(c)(1), a member shall promptly record and maintain information regarding any penalties or disincentives assessed on its associated persons in connection with a penalty bid. Side note regarding: Since brokers make money by trading Note that modern US retail brokerages mostly don't make money from stock trading commissions. Schwab, Fidelity, Robinhood, SoFi, and E-Trade all charge 0 USD for stock trades. Their revenue comes from net interest on cash balances, margin lending, securities lending, payment for order flow (Robinhood especially), premium subscriptions, etc.
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