Behind the Scenes of Corporate Trading

June 1, 2020 Joshua Shek, CFA

This topic was initially slated as a session at Synergy 2020 in Austin, TX – our plans changed, but the quality of our content didn’t, and we want to share it with the public as an evergreen resource. Learn more about Synergy here.


Have you ever considered what happens once a trade is placed? As you know, it’s not as simple as a push of a button. In fact, effective trade execution is a rather complex process with potentially significant implications. So, it’s important to know how the market works…. the rules that governing corporate trading…how 10b5-1 plans play into this… and so much more. Lucky for you, we’re here to take you behind the scenes of corporate trading.


Whether placing an order for dinner like so many of us are now a days or placing a trade, it all comes down to the execution. How many times have you had a meal delivered only to find something missing or that you’ve received the wrong meal? Now, imagine if that happened with a trade! There could be consequences on both the corporate and the participant level if proper procedures are not adhered to. So, what exactly does that mean for you as a stock plan administrator and your participants? For you, it could mean significant errors in tax withholding or proceeds, which impact a number of others areas such as your downstream reporting, happiness of key stakeholders, and the time spent addressing the mistakes. For your participants, it could mean the loss of proceeds, tax overpayment, and a generally poor overall experience.


In fact, to help protect both you and your participants, Rule 15c3-5 of the Securities Exchange Act of 1934 was established (referred to as the Securities and Exchange Commission’s “Market Access Rule”). It requires broker-dealers with market access (or that provide market access to their customers) to “appropriately control the risks associated with market access”. This is so not as to jeopardize their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.


Furthermore, Morgan Stanley has created a proprietary best execution approach to review execution quality of client trades. This approach encompasses three main pillars:


  • Diligence: Morgan Stanley conducts pre- and post-trade diligence to regularly and rigorously examine execution quality.
  • Controls: Morgan Stanley has systemic controls, alerts, post-trade pricing reviews, and supervisory and oversight reports.
  • Periodic Reviews: Morgan Stanley’s Best Execution Committee periodically reviews the firm’s overall approach to best execution.


Now, that you understand WHY it is important to have proper procedures in place and the potential ramifications if they are not, let’s delve into some important topics you should understand when it comes to trade execution.


Restricted Stock Vestings and Sell to Cover Transactions

Restricted stock is a share of ownership in your company, subject to limitations. The limitation, or restriction, applies to the length of time before the holder fully owns the stock and has the right to sell or transfer it. This length of time is known as the vesting period. Generally, restricted stock “vests” — or becomes unrestricted — in increments over a period of time. On the day that time is up — the vest date — the holder is free to sell or transfer the shares. In a sell to cover transaction, Morgan Stanley will sell sufficient vested shares to cover the taxes and commissions due. Keep in mind, when a participant sells restricted stock shares, he or she will be required to pay tax on any short-term or long-term capital gains. Participants should consult their tax advisor for more information.


Now that you understand the nuts and bolts of restricted stock, you should take into consideration the impact the trade could have on the market and how long it may take to process the transaction responsibly in the marketplace. Here is where communication is key – especially if a larger transaction is being considered that could in fact impact the market. In cases such as these, we can help you plan ahead. Simply contact your Shareworks Relationship Manager or Client Service Manager and we can discuss how to handle these transactions.


IPO Lockup Expirations

IPO lockup expiration is the date when those who held shares prior to the IPO — who were “locked” into holding those shares — can sell their stock. In many cases, these individuals hold quite a meaningful percentage of the company’s shares. So, what happens when the lockup expires? It’s possible the share price may decline a few days or more prior to the expiration date as shareholders in the market look to sell shares before the new supply hits.  


With online trading being the avenue of choice, it’s important to consider what happens behind the scenes when you’re going through this process. It is likely that you may have many participants who will seek liquidity on this date and in the aggregate will create a higher than normal supply of your company’s shares in the marketplace. Having a conversation to understand how your participants will be able to place trades online and knowing how the broker will handle those transactions after they have been placed will be important to do a few months in advance. Also, for your reporting officers, directors and other insiders, considering 10b5-1 plans has been common for new IPO companies to manage trading following lockup expiration and could be an effective way to manage the potential supply impact.   


10b5-1 Plans

A properly designed 10b5-1 trading plan can support officers, directors and other insiders in managing their equity compensation and financial goals while providing an affirmative defense against insider trading allegations. Since the Securities and Exchange Commission’s adoption of Rule 10b5-1 in 2000, 10b5-1 trading plans have grown substantially in the market. Morgan Stanley’s Preset Diversification Program (PDP)® enables sellers to set a schedule that works with their personal need for liquidity, diversification and timing requirements.


With our industry-leading program, proprietary platform and dedicated trading desk, we offer specialized resources including:

  • Orderly disposition: You can control the parameters governing your corporate trading plans, leveraging the software to enforce your plan requirements.  
  • Customization: Our team of specialists will work closely with your sellers’ Financial Advisors to structure, draft and adopt a plan that is unique to their situation.
  • Centralized Trading Desk: In addition to the general advantages of using a 10b5-1 trading plan, our centralized desk adopts, manages, and trades 10b5-1 plan orders using a proprietary plan management and trading system.  This combination of people and systems allows us to offer additional services and enhanced benefits

The combined offering of the Morgan Stanley trading program and the Shareworks platform delivers a high-quality 10b5-1 plan management experience for you and your stakeholders. Coupled with the other workflows outlined here, there’s a lot to learn about what goes on behind the scenes of corporate trading.  However, the more you know, the more you can plan for the unexpected – and your Shareworks Relationship Manager and Client Service Manager are here to help, so please contact them with any questions!

This topic was initially scheduled to be a session at our Synergy 2020 annual conference.  Our plans changed slightly, but our line-up of quality topics didn’t – want to learn more? See what Synergy is all about.

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Shareworks by Morgan Stanley services for public companies are provided by Solium Financial Services LLC and Morgan Stanley Smith Barney LLC, members SIPC, and their affiliates, all wholly-owned subsidiaries of Morgan Stanley. Shareworks by Morgan Stanley fund transfer services for private companies are provided by Solium Financial Services LLC.

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