passive market making?

[loufah]

From http://edgar.sec.gov/Archives/edgar/data/885307/000121716006000029/jcs1amendment5.htm , a Form S-1/A for an offering JCTCF is making:

In addition, in connection with this offering, licensed broker-dealers who are hired may engage in passive market making transactions in our common stock on Nasdaq immediately prior to the commencement of the offering in accordance with Regulation M. Passive market making presently consists of displaying bids on Nasdaq limited by the bid prices of market makers not connected with such offering and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited in amount to 30% of the passive market maker's average daily trading volume in our common stock during the period of the two full consecutive calendar months prior to the determination of the offering price in connection with a sale pursuant to this prospectus and must be discontinued when such limit is reached. Passive market making may stabilize the market price of our common stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. Passive market making may cause the price of the common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions.

Could someone give an example of how this works, especially regarding the last line? One JCTCF pumper is saying that this is an "explicit statement in the SEC filing that management will get market makers to put in bids and take the stock higher in advance of that offering."

 

[rufus_4000]

Quote from loufah:

From http://edgar.sec.gov/Archives/edgar/data/885307/000121716006000029/jcs1amendment5.htm , a Form S-1/A for an offering JCTCF is making:

Could someone give an example of how this works, especially regarding the last line? One JCTCF pumper is saying that this is an "explicit statement in the SEC filing that management will get market makers to put in bids and take the stock higher in advance of that offering."

Because there is no liquidity in the stock (the stock have yet commence offering), so there are no sellers, if the "passive market maker" has placed bids, then any 'actual" buyers would have to place their bids higher than the MM's bids, hence pushing up the opening price. The reason being is that the "passive market maker" have perfect knowledge as to who the sellers (the offering corporation, the underwriter via overallocation, and allocated institutional blocks, that's it), and all of the parties would benefit from a higher opening.

Of course, as the paragraph pointed out, the passive market maker can not place too high bids, since there will be no "actual" buyers, causing the MM having to purchase the security and then potentially turn around sell at a loss. So it is a balancing act.