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A gray list is a listing of securities that are currently not eligible for trade by the risk arbitrage division of an investment bank. Inclusion on this list does not mean there is anything inherently wrong with these securities. In some instances, the basis for inclusion on the list has to do with the fact that the firms issuing the shares of stock are already working with the bank in some sort of merger or acquisition situation. Once those matters are fully settled, the securities may be removed from the list, allowing the bank to actively trade the shares.
The concept behind the gray list is to protect the interests of the bank by avoiding investment in securities where an increased degree of risk is currently present. In the case of a merger or acquisition, the outcome of those proceedings will have some type of effect on the value of the shares issued by each company involved in the business deal. While that effect is often positive, it can also result in a downturn in the value of the stock issues. Until the acquisition or merger is completed and the impact is determined, the stocks remain on the gray list.
Investment banks do not make the specifics of a gray list available to the general public. The document is strictly used for internal purposes. This is because firms currently on the list are working with the bank in some capacity, and the details of those business arrangements are considered confidential. For this reason, no one is aware of who is currently on the list, other than the individual company and employees of the bank who are directly involved in the risk arbitrage division or are authorized to have access to the gray list as part of their ongoing work responsibilities.
While the stock offerings of firms currently found on a gray list are considered ineligible for trade by the risk arbitrage department, other departments or divisions of the bank may consider those shares to be eligible for trade. For example, the block trading desk at the investment bank may have no problem conducting transactions that involve those shares. This apparent contradiction in the bank’s stance is explained by what is referred to as a Chinese wall. This is essentially a division that occurs due to the confidential nature of each department’s interaction with bank customers. Block trading desks are not likely to be aware of the impending merger or acquisition, and will treat the shares issued by the client firm in the same manner as any other shares issued by other bank clients.