How does Grey market works?

Option 1: Trading of allocated IPO  shares in the Grey Market

• An investor applies to buy shares via an IPO. They are taking a financial risk because they could not be allocated shares or receive shares, but the share price may drop. Let's call them "Sellers".
• Few people believe that the share price is more important than its issue price. These investors start to collect these shares before the shares are allotted by the issue registrar during the IPO allotment process. Let's call them 'Buyers.
• Grey market dealers are contacted by buyers to place an order to purchase IPO shares at a certain premium.
• Grey market dealers contact applicants for the IPO to ask them if they would be willing to sell their IPO shares at a certain premium (if they have been allotted).
• The sellers may choose to sell their IPO shares to grey market dealers if they like the premium but are unwilling to take the risk of stock market listing. The seller must then finalize the deal at a specific price with the grey-market dealer.
• Grey market dealers receive the seller's application details and notify the buyer that they have purchased a specified number of shares on grey market.
• The allotment has been completed and the sellers may or not receive shares.
• Investors who have been allocated shares may be called by dealers to either sell them at a certain price or transfer the shares to a demat account.
• Settlement is based on the share's profit or loss as well as the grey market premium paid by buyers and sellers.
• The deal is canceled immediately if the seller does not receive any shares.

Option 2: Kostak – Trading IPO Apps in the Grey Market

• An investor applies to buy shares via an IPO. They are taking a financial risk because they could not be allocated shares or receive shares, but the share price may drop. Let's call them "Sellers".
• Few people believe that the share price is more important than its issue price. These grey market dealers start to collect these shares before they are allocated. Let's call them 'Buyers.
• The price of an application is determined by market conditions and assumptions. They offer to purchase an IPO Application at a certain premium.
• Grey market dealers may be able to sell an applicant's application at a certain premium in order to avoid the risk of being allocated.
• This type of trading is called application trading, or 'kostak. The seller of a 'Kostak' does not need to worry about his share allocation in IPO. Whether he receives the allotment, or not, he will still get the premium for which he sold the IPO allocation.
• Grey market dealers obtain the application details from the seller and notify the buyer that he purchased an IPO application at a certain premium from grey market sellers.
• The issue registrar will allot shares. The issue registrar may allot shares to the seller of the application.
• If shares have been allocated to the sale application, the seller might be contacted by the dealer to either sell them at a certain price or transfer the shares to a demat account.
• Settlement is based on profit or loss in the case of shares being sold.
• The deal will be void if the seller does not receive any shares. As he submitted his application, the seller still receives his premium.