Gray List
What Is a Gray List?
A gray rundown is a rundown of stocks that are ineligible for trade by an investment bank's risk arbitrage division. Securities on the gray rundown aren't really astoundingly risky or generally inherently imperfect, yet are regardless restricted. In such cases, the gray rundown can incorporate those firms working with the investment bank, frequently in issues of mergers and acquisitions. Once more once the firms being referred to have completed this business, the stocks might be removed the gray rundown, permitting the bank to trade them.
Grasping the Gray List
Risk arbitrage an investment strategy that tries to profit from proposed mergers and acquisitions. Specifically, the strategy attempts to exploit potential for a restricting of the gap of the trading price of a target's stock and the acquirer's valuation of that stock in a planned takeover deal. In a stock-for-stock merger, risk arbitrage implies buying the shares of the target and selling short the shares of the acquirer. This investment strategy will be profitable on the off chance that the deal is fulfilled; on the off chance that it isn't, the investor will lose money.
The gray rundown is expected to shield a bank's interests by keeping it from investing in stocks that presently carry an inherent amount of risk. The outcome of a merger or acquisition will commonly influence the value of shares issued by any of the firms engaged with the deal. The influence of such a business deal on the price of a stock can be either positive or negative, so stocks are put on the gray rundown until the deal is complete and its impact can be precisely assessed.
Confidentiality of the Gray List
Since the gray rundown incorporates firms working closely with an investment bank, it is in many cases confidential and kept close inside the bank's trading divisions. The document is made for internal purposes simply because the particulars of a bank's business arrangements with different firms are viewed as confidential. Just the firm in question and the employees of the risk arbitrage division of the bank included realize which stocks are on a gray rundown, or approach it as required by their professional duties.
Trade of Stocks on the Gray List by Other Divisions of the Same Bank
While the risk arbitrage division is banished from trading inside the gray rundown, different departments or divisions of the bank being referred to are not disallowed from trading the gray rundown stocks. For example, the investment bank's block trading desk is eligible for such transactions. This is permitted in light of what's alluded to as the Chinese wall, which keeps up with secrecy between divisions or departments of a bank so every department is unaware of the customer cooperations of different departments. Therefore, the block trading desk of the bank being referred to might be unaware that a merger or acquisition is underway, and would have not an obvious explanation to treat shares issued by the client firm any uniquely in contrast to it would treat shares issued by some other firm.
Features
- The gray rundown distinguishes the stocks that a risk arbitrage desk is restricted from trading by a brokerage or bank.
- The gray rundown forestalls investment banking clients of the financial firm doing risk arbitrage from dealing in those securities with deals pending to forestall insider trading or perceptions thereof.
- Gray records are kept stringently confidential as they can uncover the M&A or different customers of the bank.
- Risk arbitrage is an investment strategy that desires to profit from the stock prices of merger and acquisition deal stocks.
