What is the "grey market" for preferred stocks?

As I mentioned in my comment to your question a few days ago about non-cumulative preferred stocks, preferred stocks often trade on the OTC grey (or gray) market before getting their final listing. The grey market is for any type of security that have been suspended from trading or has not yet begun official trading on an exchange. Preferred stocks may begin trading there or they may begin their trading on a major exchange from the outset.

After the registration is accepted by SEC and becomes effective, there may be a delay prior to the listing of shares on the NYSE or NASDAQ. In the prospectus there will be a clause which states:

The shares are expected to start trading on the NYSE within 30 days of their issue date and could, but not necessarily will, start trading on the Other OTC market at any time on an interim basis. See example.

In general, it may take up to a week until the destination exchange finalizes the listing and the appropriate stock symbol is issued.

The prospectus will indicate what the underwriting discount is. If underwriters have a large inventory of shares, often they are willing to sell them at a discount to par (typically $25 for most preferred issues), accepting a lower mark up. The amount of the discount is a function of supply and demand. The issue may or may not trade below par during this gray market stint.

In order to trade grey market securities, your broker must offer this service and usually, you must request and receive trading approval.

The obvious risk of buying in the grey market is the same as with any investment: it goes down in value. Another risk is the opacity of the grey market. It's an unregulated market with no market maker. Liquidity can be low. The B/A spread can be wide. Therefore, you need to understand what you are investing in (or trading).

Preferred stock isn't a glitzy sector of interest and grey market preferreds garner even less interest. However, there are some obscure blogs that discuss this. Here's a link the details of a Capital One issue that I traded several times in the past week (grey market and NYSE).