[Underwriters Seen Through IPO Price]② Maximum 400% Price Limit on First Day of Listing... Is It Effective?

Expectations for Enhanced Rapid Equilibrium Price Discovery Function
Concerns Over Sharp Price Fluctuations Within a Day Also Significant

As part of efforts to enhance the soundness of initial public offerings (IPOs), financial authorities will expand the price limit range for newly listed companies on their listing day to 60-400% of the offering price starting from the 26th. For example, if the offering price is 10,000 won, the stock price on the listing day can trade between 6,000 won and 40,000 won. The Korea Exchange expects that expanding the price fluctuation range on the first day of listing will strengthen the rapid price discovery function.

The financial investment industry expressed concerns that the expanded price range could cause confusion among investors. However, they also expect it to have a positive effect on revitalizing subscription for public offerings. An IPO manager at a major securities firm said, "As the limit range widens, we expect a balanced price to form at the opening price," adding, "The phenomenon of overheating stock prices is likely to decrease relatively."

Due to high volatility on the first day of listing, caution among investors will increase, and the phenomenon known as 'ttasang' (forming an opening price at twice the offering price and then hitting the upper limit) is likely to disappear. If the stock price rises 30% from the opening price on the first day and buy orders accumulate, speculative short-term trading may continue until the next day. However, it is extremely rare for the stock price to rise up to four times the offering price on the first day and for buy orders to accumulate simultaneously.

Looking at the price trends of stocks that surged sharply shortly after listing in the past, when a stock hits the upper limit on the listing day, expectations for further gains the next day increase, causing sell orders to disappear. This effectively results in a trading halt. The lack of smooth trading could lead to 'distortion of investor sentiment.' A pattern often appeared where the stock price surged for 2-3 days after listing, then plunged sharply as profit-taking orders flooded in.

Studio Mir, which was listed on February 7, recorded a 'ttasang' on the first day. Trading volume was 26.8 billion won on the first day and 198 billion won on the second day. As the stock hit the upper limit on the first day, sell orders disappeared, and speculative short-term funds flooded in on the second day, causing trading volume to surge. The price soared from the offering price of 19,500 won to 64,100 won within three days. The current price has dropped to around 34,000 won.

Sands Lab also surged 137% compared to the offering price on the first day but has since been on a downward trend. The stock price, which rose to 27,300 won on the first day, fell to 12,000 won after four months.

Overseas, there is also a trend to expand the price fluctuation range on the listing day. In Japan, the opening price is determined based on 25%-400% of the offering price on the listing day, Taiwan does not apply price limits for four trading days after listing, and China has no price limits only on the listing day.

Of course, side effects may occur. Abnormal market situations could cause prices to rise to the limit or incur losses of more than 50% in a single day. Although unlikely, there is a possibility that a stock priced at 10,000 won at offering could fall to 6,000 won or rise to 40,000 won on the listing day.

The fact that the stock price can rise up to four times the offering price on the first day could be a factor in the success of public offering subscriptions. An IPO industry official explained, "Many retail investors seek to realize profits early after listing," adding, "Since the price increase range is larger than 'ttasang,' the average competition rate could rise."

Companies preparing for listing are also using the expanded price range as a way to attract investor interest. Secusen, which is undergoing the listing process, recently promoted through a press release that "the stock price can rise up to 400% compared to the offering price on the listing day." A Secusen official said, "With a public offering size of 3.9 billion won based on the lower end of the offering price, we are also expecting the first 'ttattabl' due to concentrated buy orders."

Underwriters are showing more sensitive reactions to confirming payment ability than to the expanded price fluctuation range after listing. As financial authorities improve various systems to enhance IPO soundness, concerns arise that confusion is inevitable during the initial phase of system implementation. An IPO underwriter said, "From the underwriter's perspective, a period of adjustment will be needed for the obligation to confirm payment ability, and from the asset manager's perspective, for the priority allocation of shares under mandatory lock-up agreements."