A fee that is charged by an underwriter (bookrunner) when investors flip an initial public offering (IPO) issue (i.e., sell it immediately after subscription). A penalty bid is meant to discourage flipping, a practice that can put pressure on the stock price. Some investors are only interested in making a quick profit on the shares by buying them and then making them available again to other investors during the stabilization period. The penalty bid comes in the guise of reduced commissions, where the bookrunner reclaims the selling concession payable on the allocation for flippers (investors who sells during the stabilization period).
Investment Banking
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