What Makes When‐Issued Trading Attractive to Financial Markets?

• Date: 01 December 2014
• DOI: http://doi.org/10.1111/fmii.12020
• Author: Raymond M. Brooks,Yong H. Kim,J. Jimmy Yang
• Published date: 01 December 2014

What Makes When-Issued Trading Attractive

to Financial Markets?

BYRAYMOND M. BROOKS,YONG H. KIM,AND J. JIMMY YANG

When-issued trading is the trading of securities prior to the actual issue of the security.

When-issued trading is active around the worldand in a variety of equity and bond markets.

In this survey,we provide a general description of when-issued trading, analyze benefits and

costs in various financial markets, present existing theoretical models and predictions, and

synthesize empirical findings. Wefind that when-issued trading promotes price discovery,

mitigates information asymmetry, provides convenience for trading ahead of the actual

issue of the security, and in some markets reduces volatility. In addition, we offer policy

implications and suggest directions for further research in this area.

Keywords: When-issued trading, stock splits, spinoffs, IPOs, bankruptcy, Treasurybills.

JEL Classification: G10, G14, G15.

I. INTRODUCTION

When-issued trading is the trading of securities prior to the actual issue of

the security. Although this type of trading might be unfamiliar to some market

participants, it has been active since the 1920s in the United States and was a

common practice of the New York Curb Exchange, the original name of the

American Stock Exchange which is now the NYSE MKT LLC. Initially, the most

common when-issued trading was in rights offerings and stock splits, while the

least common was in pending reorganizations. Today we have very active when-

issued trading in both bond and equity markets throughout the world. The largest

in terms of volume and dollar amount is the trading prior to a Treasury-Bill

auction. In the equity markets, when-issued trading happens prior to stock splits,

spinoffs, initial public offerings (IPOs), and bankruptcy reemergence. In Figure 1,

we provide a classification chart of financialmarkets that have when-issued trading

available for market participants.

What is so special about when-issued trading that it exists in many different

markets? We provide a comprehensive review of existing studies on when-issued

trading to shed light on its overall attractiveness in various markets. Although

the when-issued trading process is similar, the pricing, liquidity, volatility, and

market participants vary across the different markets. By presenting theoretical

models and synthesizing empirical findings, we clearly identify the documented

benefits and costs of when-issued trading in various markets. In addition, we offer

policy recommendations for market regulators to consider and suggest directions

for future studies in this area.

Corresponding author: J. Jimmy Yang,College of Business, Oregon State University, Phone: (541)737-6005, Email:

jimmy.yang@bus.oregonstate.edu

C2014 New York University Salomon Center and WileyPeriodicals, Inc.

246 Raymond M. Brooks et al.

Abbreviations:

IPO is initial public offering

RW is regular-way trading

WI is when-issued trading

WD is when distributed trading

When-issued Trading

(Markets)

E

Q

UITY DEBT

IPO

Bills Bonds

R

W

W

I

BANKRUPTCY

SPINOFFSSPLITS

WDWI

CORPORATE

GOVERNMENT

MUNICIPALS

TREASURY

Figure 1: Types of when-issued markets.

In the next section, we provide an overview of the when-issued trading process.

Section III focuses on each of the when-issued markets, and in Section IV, we

offer policy implications and discuss other related issues. Our conclusion appears

in Section V.

II. WHEN-ISSUED TRADING PROCESS

BACKGROUND

Again, when-issued trading is the trading of securities prior to the actual issue

of the security. The actual term is “when, as and if issued,” indicating the traded