Are banks abusing stabilisation?

Author: Nicholas Pettifer | Published: 1 Sep 2009

Nicholas Pettifer
Senior staff writer

Greenshoes are misunderstood. They are often seen as the hallmark of an excellent equity issue, but that's not what they are designed for. Rather they are an insurance policy against stabilisation purchases – that can be profitable for the underwriter.

Underwriters are under an obligation to stabilise share prices after an offering. But there is a grey area when banks hold large amounts of shares due to that stabilisation and can sell them for a hefty profit. Does it count as market abuse in Europe? The Committee of European Securities Regulators (Cesr) published an opinion earlier in the year, but banks felt it was not detailed enough and they are still nervous about the boundaries of safe harbours. Traders and compliance departments are arguing over what is and isn't market abuse.

"The thing is, it is complex and most lawyers don't understand it very well. Neither do...