How Grey Market works?

Option 1: Trading IPO Allocated Shares in Grey Market:

• Investor applies for shares through an IPO. They take a financial risk as there are chances that they may not get allocated any share or they receive the shares but shares may list below the issue price. Let's call them ‘Sellers'.
• There are few other people in the market who think that the share values more then its issue price. They start collecting these shares even before they are allocated by the issue registrar through IPO allotment process or before shares are in the stock market legally for sell through stock exchanges. Let's call then ‘Buyers'.
• Buyers contact the grey market dealers and place the order to buy IPO share at certain premium.
• The grey market dealer contact sellers who applied in the IPO and ask them if they are willing to sell their IPO shares (if they receive allotment) at certain premium at this time.
• If the sellers like the premium and they are not willing to take risk of stock market listing, they may sell the IPO shares to the grey market dealer and book the profit. At this time the seller has to finalize the deal with the grey market dealer at a certain price.
• Grey market dealer get the application detail from seller and send a notification to the buyer that he bought a certain number of shares from the sellers in grey market.
• Allotment is done and sellers may or may not receive allotment of shares.
• If shares are allocated to the investor, either he may get call from the dealer to sell them at certain price or to transfer allocated shares to some demat account.
• In case of selling the shares, settlement is done based on the profit or loss and the grey market premium at which buyers and sellers made a deal.
• If no shares are allocated to the sellers the deal get canceled without any settlement.

Option 2: Kostak - Trading IPO Applications in Grey Market:

• Investor applies for shares through an IPO. They take a financial risk as there are chances that they may not get allocated any share or they receive the shares but shares may list below the issue price. Let's call them ‘Sellers'.
• There are few other people in the market who think that the share values more then its issue price. They start collecting these shares through grey market dealers much before the shares are even allocated. Let's call then ‘Buyers'.
• Buyers decide the price of the application based in various assumptions and market conditions. They give an offer to the sellers that they are willing to buy an IPO Application (without knowing that how many shares will get allocated) at certain premium.
• To avoid the risk of allocation seller may sell their application at certain premium to the buyer through grey market dealer.
• This kind of trading is call application trading or ‘kostak'. In case of ‘Kostak' seller need not to worry about the share allotment in IPO. He receives the allotment or not he will get the premium at which he sold his IPO allocation.
• Grey market dealer get the application detail from seller and send a notification to the buyer that he bought an IPO application at certain premium from the sellers in grey market.
• Allotment is done by the issue registrar. The application seller sold may or may not receive allotment of shares.
• If shares are allocated to the sold application, either seller may get call from the dealer to sell them at certain price or to transfer allocated shares to some demat account.
• In case of selling the shares, settlement is done based on the profit or loss.
• If no shares are allocated to the sellers the deal is over without any settlement. The seller still gets his premium as he sold his application.