After an IPO is priced at $20 per share, the lead underwriter oversold the offering by 15% through the overallotment option and the stock opens trading at $18.50. The underwriter enters stabilizing bids and also purchases shares in the open market to cover the short position. What is this market activity called?

Why B — A syndicate covering transaction

Syndicate covering transactions are purchases of securities in the open market by the underwriter to cover a syndicate short position created through overallotments. Under Regulation M Rule 104, these transactions are permitted as they help support the market price and reduce the impact of the overallotment short position. When the stock trades below the offering price, the underwriter can cover the short position through market purchases rather than exercising the overallotment option, which actually benefits the company since fewer dilutive shares are issued.