Gray market trading (or grey market, in some parts of the world) is unofficial, off-market trading in a security.  It typically occurs with equities either when official trading in the security has been suspended, or, in the case of new securities, during the period between the holder obtaining the right to the security and the time when official trading begins.

The latter case occurs frequently outside the US, where it is customary in many countries that IPOs or shares created through a rights issue do not trade for several days after they are paid for.  An analogue in the US would be “when issued” trading of a new stock created out of an already-existing parent and spun off in the form of a dividend.  In such a case the first day of trading may be a week or so after holders of the parent company stock qualify for the dividend.  The recent spinoff of AOL is an example.

The most important characteristic of gray market trading is that the official means of recording and settling a trade are not available.  In the strictest sense, the transaction cannot be completed until the official books are open, or reopened in the case of a stock suspension.  So although a broker has put together a buyer and seller who have agreed on a price, the arrangement is subject to all parties honoring their word.  Although in practice it’s unlikely, in theory it’s possible that a sharp price movement after that trade has been arranged will cause one party to “break” the trade.  In such a case, there is no practical recourse for the other party.

Because of the portfolio pricing complications that would arise from a broken gray market trade, portfolios that have daily inflows and outflows, like mutual funds, may hesitate to participate in the gray market.