Why IPO Stocks Keep Surging After Listing: Zerodha CEO Nithin Kamath Explains the ‘Short Trap’

The Indian IPO market has seen many stocks continue to climb in value for several days after their initial listing. Nithin Kamath, the CEO of Zerodha, recently explained one technical reason behind this trend: short deliveries and the resulting exchange auctions.

Kamath pointed out that while supply and demand imbalances, along with limited free float, are obvious factors, many traders who attempt to short IPO stocks during the day can find themselves in a difficult situation. Specifically, if a stock hits its upper circuit, these traders may be unable to complete their trades, leading to short deliveries.

According to Kamath, short deliveries trigger exchange auctions. When a short delivery occurs, the exchange steps in to settle the trade through an auction, which typically takes place between 2:30 PM and 3:00 PM on the following day. These auctions can result in significantly higher prices compared to the prevailing market price. Kamath cited the example of Meesho's IPO, where the auction price reached Rs 258, while the market price at the time hovered around Rs 226.

This mechanism not only contributes to the upward momentum often seen in IPO stocks but also presents opportunities for investors who hold shares in their demat accounts. Kamath emphasized that retail investors can directly offer their shares during the auction window. This allows them to potentially exit their positions at elevated prices while simultaneously assisting the exchange in settling trades. Zerodha has incorporated this functionality into its platform, enabling users to seamlessly participate in these auctions using their holdings.

Kamath cautioned investors that failing to take advantage of this auction process means "handing profits to someone else," and he urged them to understand how auctions work within the IPO settlement process.