====== When-Issued Trading (WI) ======
When-Issued Trading (also known as 'WI trading' or 'when, as, and if issued' trading) is the conditional buying and selling of a [[security]] that has been authorized but not yet officially issued or distributed. Think of it as a financial "pre-order." Traders agree on a price today for a security that will only be delivered at a future date, //if and only if// it is actually issued. These transactions typically occur in the period between the announcement of a new security—like shares from a corporate [[spin-off]] or newly auctioned [[government bond|government bonds]]—and the official date when those securities are delivered to investors. If, for some reason, the planned issuance is canceled, all when-issued trades are declared null and void, and the transactions are unwound as if they never happened.
===== How Does It Work? =====
==== The Nuts and Bolts ====
The process is surprisingly straightforward, even if the implications are complex. When a company announces a major corporate action like a [[merger]] or a [[spin-off]], or a government announces a new [[Treasury Security]] auction, an [[underwriter]] or exchange will facilitate a WI market.
Investors can then place buy and sell orders just as they would for a regularly traded [[stock]]. However, no shares or money change hands at this point. These are all conditional contracts. The primary purpose of this market is [[price discovery]]—it allows the financial community to gauge demand and establish a probable opening price for the security before it officially hits the market.
To make it simple, imagine a hugely anticipated video game is announced. Some stores might allow you to pre-order it at a set price. You're locking in your copy, but no money changes hands until the game is officially released. If the game's development is canceled, all pre-orders are simply canceled. When-issued trading operates on a very similar principle.
==== Key Scenarios for WI Trading ====
  * **Corporate Restructuring:** This is the most common arena for WI trading. When a company spins off a division into a new, publicly-traded entity, shares of the "newco" often trade on a WI basis before the separation is legally finalized.
  * **New Bond Issues:** Particularly for U.S. Treasury securities, a vibrant WI market exists between the auction day and the settlement day. This allows large players to manage their [[interest rate risk]].
  * **Stocks Undergoing Splits or Reorganization:** Sometimes, shares of a company undergoing a significant change to its capital structure will trade on a WI basis to reflect the post-change reality before it is formally complete.
===== A Value Investor's Perspective =====
==== Speculation vs. Opportunity ====
From a classic value investing standpoint, WI trading is treading on thin ice. It is inherently speculative. You are not buying a piece of a business based on its proven [[earnings power]] or a solid [[balance sheet]]; you are betting on what the market's initial sentiment for a security //will be//. The father of value investing, [[Benjamin Graham]], would almost certainly wave a red flag, as the practice is divorced from the deep, fundamental analysis of an existing business. There is simply no [[margin of safety]] to be found in a security that doesn't technically exist yet.
However, a savvy investor doesn't have to participate to benefit. The WI market can be a valuable source of information. By observing the price action, you can get a real-time gauge of the market's valuation of a new entity. For instance, if you've done your homework on a spin-off and calculated an [[intrinsic value]] far above the WI trading price, it might signal a potential mispricing and an opportunity to watch closely once regular trading begins. You're using the WI market as a research tool, not a trading venue.
==== The Risks Involved ====
  * **Cancellation Risk:** This is the big one. If the underlying corporate action (merger, spin-off) is called off, all WI trades are canceled. While you don't lose your investment capital, any handsome paper profits you had simply evaporate into thin air.
  * **High Volatility:** WI markets are often thinner and more volatile than regular markets. Prices can swing wildly based on rumors and news flow rather than solid fundamentals.
  * **Information Asymmetry:** Professional traders and institutions often have access to better information and analysis regarding the new security. The average investor is at a distinct disadvantage in this environment.
===== The Bottom Line =====
When-issued trading is a forward market for securities, allowing participants to speculate on or hedge against the opening price of a new issue. While it plays a functional role in price discovery for the broader market, it is largely a playground for professionals and speculators.
For the prudent value investor, WI trading is best treated as a spectator sport. It offers fascinating clues about market sentiment but is a dangerous game to play directly. It prioritizes predicting short-term price movements over the patient, fundamental analysis that is the bedrock of sound, long-term investing.