What is a Bulge Bracket?
How Does a Bulge Bracket Work?
When a company issues new securities in the market, groups of investment companies called "underwriting syndicates" offer the security to the public for the first time. The company in the underwriting syndicate that issues the highest volume of the new security in the market is called the bulge bracket. This investment company's name receives the top spot on the tombstone (the advertisement alerting the public of the new issue).
To illustrate, suppose Company XY is issuing a new security called PrimeXY shares. Five investment companies, the underwriting syndicate, come together to spread the risk and profits associated with underwriting a new security issue. The investment companies in the syndicate work to sell the shares of PrimeXY in the market. The bulge bracket will be the investment company in the syndicate with the most sales of PrimeXY. In this case, the investment company in the syndicate with the highest sales volume is ABC Investments; therefore ABC Investment's name will appear on the tombstone first, followed by the next four investment companies in order of their sales.
Why Does a Bulge Bracket Matter?
Companies initially issue securities as a way to raise funds in exchange for a repayment with interest (in the case of a bond) or partial ownership in the company (in the case of stock). The companies in the responsible for successfully putting the new security on the market each take on significant risk since they must raise the intended funds for the issuing company while still ensuring that their company profits from the sales.
The investment companies that participate in the syndicate are usually investment banks.