What is Grey Market? All You Need to Know

 Trading in grey markets basically means trading over-the-top securities, but not officially sold. It involves unregulated and unofficial brokers, traders, or sellers. Due to this, grey markets are also known as parallel or middle markets.

What! you are not getting my point? No worries, I’ll explain everything in detail. In fact, our team recently researched the topic and interviewed industry peers to provide you with a detailed insight into the Grey markets.

First I’ll Tell you About the Grey Market

In Grey markets, the buyers and sellers start trading before the official release or sometimes even after suspension.

So, this can be explained by an example where the security issuing personnel look for the grey market pricing by selling a small part of the initial public offering (IPO) to some reputed investors or high net worth individuals. This is done in order to create a viable demand for these shares during the actual IPO launch and it also helps to earn better trust among the other retail investors.

So, all the transactions that have been taking place in the grey market eventually get reflected in the official exchanges. The transaction amount charged for these securities is known as grey market premium (GMP).

The GMP in simpler terms can also be said as the rate at which a broker or an issuer unofficially sells securities. This way other investors buy these securities in the grey market because of the company’s reputation, the demand, and the bull effect in the market.

In the same manner, there are investors who also buy IPOs in grey markets so that they have time to estimate the listing prices of the shares and can evaluate the gains or losses that they will have to incur.

However, in either case, there will also be risks and unknown factors involved in the process this is because there can be fluctuations or other variables involved.

Here Is All About the Grey Market Stock

Grey market stocks are also known as parallel market stocks and these are different as compared to traditional stocks. These are traded in a different manner which is outside the potential market working of regular stocks.

Usually, these are operated by intermediaries and brokers and work a lot on anticipation and prediction these come into play before the official listings are out.

The trading is run basically by demand and valuation, unlike the official trading practices. It is also done via unauthorized or unofficial routes and procedures and has a scope of investment and withdrawal at any time.

We interviewed Dhari Alabdulhadi, CTO and Founder of Ubuy Netherlands, and talked about the positive and negative implications of grey markets. Here is what he said:

“Positive Implications

They offer access to scarce or costly products.

Pressure from grey marketers pushes innovation, coercing the market to adapt to changing consumer demands.

Negative Implications

Loss of control over pricing and distribution may harm consumer safety.

Risking product quality and consumer safety might create legal challenges as performance issues arise.

Consumer behavior may shift towards valuing authenticity, prompting companies to secure distribution. These will ultimately influence consumers’ purchasing decisions in grey markets. Market dynamics might favor direct sales and less reliance on traditional distribution.”

Grey Market Goods

Grey markets are not limited only to shares or securities, it is basically a market for goods also where the channels are unauthorized. So, these can include sellers selling products that are not legal or authorized in those vicinities or territories via unauthorized dealers. Such products could be electronic gadgets, shoes, or other products.

They attract customers more and create demand because the prices are cheaper than the actual store ones or via authorized sellers/resellers. The catch however is that these products might not offer the same type of guarantee and post-purchase services as the original product and many times they can even be copies of the original products.

If not exact copies they can replicate products based on the same line of technology or base design.

Other means to accomplish the same will be selling grey market goods that are not brought from the original suppliers and selling them forward. They can also procure goods via routes that are not authorized, this is done to get away from some extra charges that may apply if done in an authorized manner. These goods might also void the legal agreements or not be in terms of the contractual agreements.

Victor Santoro, Founder and CEO of Profit Leap, discussed the challenges and unprecedented opportunities for industries by the prevalence of grey markets with the Icy Whiz team. Here is what he had to say:

“From my experience in utilizing AI and machine-learning technologies in business operations, the prevalence of grey markets presents both challenges and unprecedented opportunities for industries like finance, technology, and consumer goods.

Grey markets, while often perceived negatively due to their potential to undermine official channels, stimulate innovation and competition, accelerating the adoption of advanced technologies.

For instance, in the Profit Leap business acceleration firm where I spearhead, our adoption of HUXLEY, an AI-powered business advisor chatbot, showcases how technology can effectively navigate complex market dynamics, offering tailored, strategic solutions that could mitigate some of the adverse effects of grey markets.

Moreover, the rise of grey markets emphasizes the importance of consumer trust and brand loyalty.

As observed in the surge of user-generated content and the critical role of consumer feedback in shaping product development and marketing strategies, businesses that prioritize transparency and customer engagement are better positioned to thrive.

This approach not only counters the undifferentiated competition from grey markets but also builds a resilient brand image that withstands market volatilities.

In the long term, I foresee a market landscape where the lines between traditional and grey markets blur, driven by consumer demands for authenticity, affordability, and personalized experiences.

Businesses that leverage data insightfully to understand and predict consumer behavior, much like our analysis of market trends at Profit Leap, will navigate this transition successfully.

The agility to adapt to regulatory changes, coupled with the strategic use of technology to enhance customer experience, will delineate future market frontrunners.

Hence, by recognizing the nuanced role of grey markets, businesses can strategically harness their potential for innovation and customer-centric growth.”

You Must Know About Its Pros and Cons

Let’s Check the Pros First

The investors have a very flexible approach in a grey market scenario, they can invest and withdraw at an open timing. So, even before the IPOs are officially listed they can withdraw which in turn would help them to take advantage of price fluctuations if any.

Along the same lines, we can also see that in the grey market securities, the issuers can provide estimated pricing before the official listing thus providing insights that can help you make better and informed decisions.

Due to the parallel goods selling in the grey market, it provide the customers an opportunity where they can even buy goods at reduced prices from the authorized sellers as they have other options available at lower prices to compare with.

Even when we see the manufacturers, they benefit from grey markets because via both authorized and unauthorized ways they can actually expand the distribution via different channels, to not only increase the sales but also the profits.

There are times when even the official distributors use the grey market routes to sell off the excess inventory.

The Icy Whiz team interviewed Tiago Pita, Brand and eCommerce Director at Whole Food Earth, on this topic. Here is what he said:

“On the positive side, grey markets can foster competition, offering consumers more choices and potentially lower prices. However, they can also undermine legitimate businesses, erode consumer trust, and create regulatory challenges.

Over time, this could lead to increased consumer skepticism and a shift towards more regulated markets. Additionally, grey markets may disrupt traditional market dynamics, pushing companies to innovate and adapt to changing consumer behaviors to maintain their competitive edge.”

Here Are the Cons

Due to the unofficial timelines and the investment cycles that are being followed, the prices that are estimated for the IPOs in the grey markets are not reliable.

And there is an added advantage to the reputed or customary investors other than the seasoned high net worth individuals so this in a way hampers the natural market dynamics by limiting participation.

The quality of the products is the second most important thing which is not guaranteed in the grey markets because they might even be manufactured elsewhere. Due to this, the original products of the brand are also affected and the brand’s reputation might not hold the same place in the long run due to the low quality counterfeits.

Similarly, the original and official distributors and supply chains are also disrupted which affects the product pricing along with other factors.

Min Hwan Ahn, a seasoned attorney with 20 years of legal experience, brought a legal perspective on grey markets’ implications. Here is an excerpt from the interview:

“From a legal perspective, grey markets often emerge in a regulatory void, capitalizing on price differentials and arbitrage opportunities. While not strictly illegal, they can undermine official distribution channels and erode brand value over time.

Lack of quality control in grey market supply chains also raises product integrity and consumer safety concerns.

However, grey markets can also stimulate competition and expand consumer access to goods, especially in developing markets. They act as a check on monopolistic practices and keep prices in check.

Consumers benefit from more choices at lower price points, even if not through authorized sellers.

In the long term, I believe the prevalence of grey markets will drive tighter international coordination on licensing, pricing, and distribution strategies by major brands.

We’ll see more active monitoring and enforcement against unauthorized sellers. Technologies like blockchain could help secure official supply chains.

But grey markets will likely always find opportunities to satisfy unmet consumer demand. Companies will need to compete on value-added services, not just price, to retain customers.

Adaptable, omnichannel strategies that selectively allow grey market activity may prevail over hardline stances.”

For the grey market goods sold, we can see that not only are we compromising on the source of obtaining them; but, they might not even get a proper post-sales service. As they are scored via unauthorized dealers and routes.

Guest Author: Saket Kumar

Last Updated on May 15, 2024 by Pragya