BLOCKBUSTER stockmarket flotations are back, it seems. Witness the IPOs of Royal Mail and Twitter. Yet the banks which led these and other listings have been criticised for not pricing the companies accurately. In Britain Royal Mail’s shares rose 38% on its first day of trading, indicating that its £3.30 valuation ($5.30) was far too low. And Twitter saw its shares rise 72%. The micro-blogging service, critics snipe, was deliberately underpriced to avoid a repeat of Facebook's IPO disaster in 2012, when over four months the social network's shares lost more than half their listing value.

Investment banks usually value companies about to float by working out the earnings multiple of the company compared to its peers and by talking to big institutional investors about what price they would be willing to pay for a firm's shares. But a new approach coming out of Britain is challenging this top-down method: "grey markets". Launched by spread betting firms, they allow the average Joe to bet on the price of new shares at the end of the first day of trading.

According to IG Group, the world’s largest spread-betting firm, its grey markets were more accurate than bankers and their advisers in predicting the price of both Royal Mail and Twitter (see charts). In the case of Twitter, IG Group's markets expected that shares would end up being worth $44, only 90¢ less than the level they actually reached at the end of the first day of trading. In contrast, Twitter and its bankers had set the IPO price at just $26.

But grey markets have not always been more accurate. In the days before Facebook’s IPO, spread betters’ predictions of how much the company was worth rose sharply, hitting $129 billion when grey markets closed. Yet Facebook reached a mere $104 billion by the end of its first day of trading, and only because banks intervened to stabilise the share price.

Grey markets could prove a useful tool, among other indicators, to guide IPO pricing. Yet setting the price of a company to be floated is not just about determining how much it is really worth. It is also the result of a negotiation over how to distribute the expected proceeds of a listing between the first buyers of shares (mostly the underwriting banks' institutional customers) and the firm's investors (mostly founders and venture capitalists). And stock markets do not always behave as rational investors or even prediction markets expect. John Maynard Keynes's 1931 warning is still valid today: “Nothing is more suicidal than a rational investment policy in an irrational world."