How do underwriting syndicates influence security pricing?

1 Syndicate formation

The first step in forming an underwriting syndicate is choosing a lead underwriter, also known as a bookrunner. The lead underwriter is the main investment bank that negotiates the terms of the deal with the issuer, sets the initial price range of the securities, and manages the bookbuilding process, which is the collection of orders from potential investors. The lead underwriter also invites other investment banks to join the syndicate, based on their expertise, reputation, and relationships with investors. The syndicate members agree to buy a certain amount of securities from the lead underwriter and sell them to their own clients, earning a commission or spread.

2 Syndicate roles

The underwriting syndicate is divided into different roles, depending on the level of involvement and commitment of each member. Co-managers, for example, work closely with the lead underwriter in setting the price and allocation of the securities. They also take part in the roadshow, a series of presentations to market the securities to potential investors. Underwriters, on the other hand, purchase a smaller share of the securities from the lead underwriter and sell them to their own clients. Lastly, selling group members are investment banks that do not buy any securities from the lead underwriter but act as agents to sell them to their clients for a fee. Each role carries varying levels of responsibility and involvement in the syndicate.

3 Syndicate pricing

The underwriting syndicate influences the pricing of the securities in several ways. First, the syndicate members provide feedback to the lead underwriter on the demand and valuation of the securities, based on their interactions with potential investors. This helps the lead underwriter adjust the price range and the final offering price of the securities. Second, the syndicate members help create a market for the securities, by placing orders and bids on behalf of their clients. This affects the supply and demand dynamics and the price discovery process of the securities. Third, the syndicate members help stabilize the price of the securities after they start trading in the secondary market, by buying or selling shares to smooth out price fluctuations. This is known as the greenshoe option, which allows the syndicate to buy up to 15% more shares from the issuer at the offering price, if the demand is high, or sell them back to the issuer, if the demand is low.

4 Here’s what else to consider

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