The concept of the gray market involves conducting market operations outside the formal authorized setting. This concept is very common among the market participants. Sometimes exchange or trade of stock takes place prior to the stocks being listed in any authorized market, based on speculation. Such a market stands as a gray market.
Some of the common terminologies in gray market operations are:
Gray Market Premium (GMP)
The market determines Gray Market Premium (GMP) as the premium value at which the stocks of a company trade in the gray market, i.e., the unofficial market before any stock exchanges list them. GMP reflects the market’s perception of the company’s potential for growth and future demand.
Positive gray market premium means the shares have high demand and investors are willing to pay a higher price. Negative gray market premium means investors are skeptical about the stocks and are less interested in the stocks.
This term means the act of buying and selling in the stock market based on non-public, material information about the stock or company. Here, investors receive or manage to receive exclusive information (which are not available to the general public) on or about any stock or company which can provide them an upper edge in trading. Insider trading is illegal as it violates the “information symmetry” or “Equal right to information” in a market economy.
Pump and Dump
One of the gray market risks is “ Pump and Dump”. Market participants artificially influence the stock price by spreading positive or influential fake information. Once the price has risen, they sell off their holdings at a profit. This is a fraudulent scheme.
This is another manipulative scheme in the gray market. A group of investors involved in wash trading engage in simultaneous coordinated buying and selling of the target stock, creating a false impression of high trading volume. This affects and misleads the other investors and their investment behavior.
Most of the clients have a proxy broker for executing the buying and selling of the stocks. In front running, brokers execute the order of their clients on their behalf. The intention behind this is to benefit themselves rather than interest the client. Brokers, based on insiders’ information, hold the position on the stock (as per their interest rather than the order from the clients) for the profit. This is the case of unethical practice.
Churning is another misconduct by the broker or agent. In this, brokers or agents are involved in excessive buying and selling of stocks in the gray or secondary market just to generate the commission for themselves. In the gray market, brokers without any authorization from the client trade in the particular stocks without considering the client’s investment objectives or risk tolerance.