Depository Trust Company IPO Tracking System Definition

What Is the Depository Trust Company IPO Tracking System?

The Depository Trust Company IPO Tracking System is a system administered by the Depository Trust Company that monitors the purchase and sale of securities that have recently been issued through an initial public offering (IPO).

One of the principal uses of the system is to identify instances where insiders have sold their shares shortly after the IPO. This practice, colloquially known as “flipping”, is often frowned upon by underwriters.

How the Depository Trust Company IPO Tracking System Works

Although underwriters rely on some insiders selling their shares in order to make those shares available to retail investors, they also wish to avoid a situation where insider selling places downward pressure on the market price of the newly issued security. 

To maintain this balance, underwriters will often obtain commitments from their clients, who will pledge to not sell their shares within a specified timeframe. Importantly, these insiders may not be required to follow through on this pledge by any laws or regulations. Therefore, the underwriter may need to rely on their clients’ promises not to flip their shares following the IPO.

The Depository Trust Company IPO Tracking System provides a means for underwriters to verify whether these promises have been kept. By monitoring all transactions of stock issued through a recent IPO, the tracking system allows underwriters to review reports of IPO-related share movements, thereby identifying which investors chose to flip their shares.

If an underwriter learns through the tracking system that a client broke their promise to not flip their shares, the underwriter may respond by not offering them an allotment to the next IPO. For this reason, clients who plan to flip their shares will usually let the underwriter know ahead of time, in order to not jeopardize future business.

Example of the Depository Trust Company IPO Tracking System

Imagine that XYZ company has announced its intention to launch an IPO, selling its stock for the first time on public exchanges. Before the IPO, the shares were only available to a handful of company executives, major investors, employees, and other insiders.

During the IPO process, XYZ will look for a bank or other financial institution to underwrite the public offering: the underwriter buys shares at a certain price, which will then be sold on public markets. In order to prevent company insiders from flooding the market, the underwriter may require that company insiders agree not to sell their shares for a certain period after the IPO.

The Depository Trust Company IPO Tracking System safeguards the IPO from early selling. Based in New York City, the Depository Trust Company is one of the world’s largest securities depositories. Using the IPO tracking system, underwriters can check securities records to determine if XYZ insiders sell sold their shares before the agreed-upon date.

In addition to providing safekeeping through electronic recordkeeping of securities balances, the DTC also acts as a clearinghouse to process and settle trades in the corporate and municipal bond markets.

The Bottom Line

The Depository Trust Company IPO Tracking System is used to monitor transactions in shares that have recently been released to the public. This is useful to determine if major shareholders have sold their shares shortly after a public offering, which could lower the value of a company. Securities underwriters may use this tracking system in order to prevent such a sell-off.