Stock Price Formulation

Is there a special mechanism for trading newly-listed stocks?

Update : Jan. 04, 2010


Answer :

Basically newly listed stocks are traded in the same way as any other listed stocks. Thus the Itayose and Zaraba methods are used as explained in 'How are stock prices determined?'

However, there is one point in which the trading rules for newly listed stocks do differ from those of other listed stocks. This is that the daily price limit does not apply until an initial price has been determined. This rule only applies to stocks that have never been listed or registered on any other market before. This is because they do not have a previous market price, and it is important for a reasonable market price to be determined as quickly and smoothly as possible. Daily price limits can only come into effect once an initial price has been determined.

So for example, let's consider the case of a newly listed stock with a public offering price of 700 yen. If TSE applies the daily price limits, the stock will only be able to trade between 550 yen and 850 yen(at this price level the parameters are ±150 yen). However, because the daily price limits are not applied until the initial price has been determined it is possible for an initial price of 1,000 yen to be achieved. Daily price limits are applied based on they initial price the moment it is determined, so in this case the stock may trade at 700 yen~1,300 yen after the initial transaction (at this level the parameters are ±300 yen).

Flexibility is also shown with regard to the application of special quotes. TSE allows special quotes to renew to a price of 2.3 times the offering price when the price goes up, or 75% of the offering price when the price goes down. Intervals for renewal of special quotes, by time and price, are not fixed so that TSE may determine them based on the real time order flow. These measures, only adopted until the initial price has been determined, protect investors from unexpected losses arising from excessively sharp price fluctuations.

As indicated above, these measures do not apply to stocks that transferred from other markets as reasonable market prices have already been established for them. Such stocks are treated in exactly the same way as other listed stocks even if the initial price on the TSE market has not been determined.

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