Greenshoe, What You Need to Know.

By Jason Fittler

No this article is not about women’s fashion, it is about deception in the stock market.

Greenshoe is more formally know as the over-allotment mechanism.

This is used to provide after market support for a new float.

It was last used in the 2006 Telstra float and now looks to have the green light for the QR National float.

How it works.

First the ASIC has to approve the scheme, not every new float is allowed to do this.

Once approved the float managers (such as Credit Suisse, Goldman Sachs, Merrill Lynch, RBS and UBS) are able to sell 15% more shares than they are allotted by the company being floated. This effectively means they will sell more shares through the float to their clients than they have to sell.

Once the company floats, the float managers will then buy back the excess shares through the market, they only do this if the price is below the issue price of the float. This allows the company being floated to artificially hold up the price of the stock in the after market.

Although legal, I frown on this sort of behaviour. If a company is priced right, there is no need to support the stock in the after market. Doing so indicates to me that the stock is over priced in the float.