IPO Share Pricing and Allocation Methods


Book Build

The Book Build system is far and away the historically preferred system. The name originates from the lead manager’s buildup of the Order Book of investors’ amounts and price. This method canvasses the underwriting syndicate’s various institutional and retail distribution networks during the roadshow to determine the depth and breadth of demand. The syndicate manager will work with various senior colleagues, as well as the client to find the “best” potential owners, often described as those investors who are experts in that particular industry or those with a history of being long-term holders. The syndicate manager then balances the simultaneous requirements of his two client constituencies: investors and the corporation to price the IPO. Generally investors want as low a price as possible and corporations want the highest price consistent with a stable aftermarket. Syndicate managers utilize their professional judgment to determine a reasonable compromise of these two constituencies wherein a price is set. The “Book Build” system’s benefit of  human judgment is also its potential weakness if in the hands of unskilled or unethical brokerage firms.


Dutch Auction

Dutch Auction’s have been used successfully for many years by the US Treasury to auction its debt securities and in Europe to auction stocks. More recently they have been applied to US stocks, though the method has yet to become widespread. In a Dutch Auction for stocks, investors make a bid at a price for specific amounts of stock they would like to own.  They may also bid more than once with different prices and amounts.

When the auction ends, the bidders who place the highest bid for the items will earn the right to purchase the items at the lowest successful bid made by one of the winning bidders— We describe some possibilities below:

Let's say there is a Dutch Auction and the seller is offering 10 color TVs with a starting bid of $100. If 10 people bid on this auction and bid only the minimum bid amount of $100, all 10 members who placed their bids would be the winning high bidders for $100.

Because the example above somewhat oversimplifies the Dutch Auction process, a more complex example of a Dutch Auction follows:

Using the auction in the example above, let's say that 20 people placed bids on this auction. This time, however, 15 people bid $100 and five people bid $150. When the auction closes, the five people who bid $150 will be winning high bidders and the other five TVs will go to the people who bid $100 first. The best part of this scenario is that ALL winning bidders will have to pay only $100 for the TV. Remember: in the Dutch Auction format, all winning bidders pay the lowest bid amount made among the group of winning bidders.

In a final example of this same auction, let's say that 10 people bid $150 for the TVs and the other 10 bid $100. In this example, the 10 bidders who had bid $150 would be the winning high bidders of the auction and would pay $150 for their TV. Remember: if enough people bid above the minimum bid, the final price of the item will increase as well. In our example, at least 10 people must bid over $100 for the price to increase above the opening bid price.

In the case of multiple quantities bid on by a single bidder, the lowest bidder among the winning bidders at the end of the auction may not earn the right to purchase the complete quantity they bid on. This is because there may not be enough left to fulfill his or her entire bid quantity after the higher bidders have been processed. In other words, if the lowest winning bidder requested a quantity of three TVs, that bidder may be entitled to only one TV in the event that nine other TVs are allocated to higher bidders. The only way around this problem is to ensure that you are not the lowest bidder.

Please note that, if you are the only bidder in a Dutch Auction, and you bid on the full quantity the seller is offering at an amount over the opening bid, you will be the winning bidder for all items at the price you bid per item.


The lottery is very uncommon and only used to allocate shares received by an underwriter in an oversubscribed offering to their interested clients on a random basis

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