What is an 'Auction Market'
An auction market is a market in which buyers enter competitive bids, and sellers enter competitive offers at the same time. The price at which a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell. Matching bids and offers are then paired together, and the orders are executed. The New York Stock Exchange (NYSE) is an example of an auction market.
BREAKING DOWN 'Auction Market'The New York Stock Exchange (NYSE) is an example of an auction market.
The process involved in an auction market differs from that associated with an over-the-counter market. An auction market does not involve any direct negotiations between buyers and sellers as individuals, while trades completed over-the-counter are negotiated. Most traditional auctions involve multiple potential buyers, or bidders, but only a single seller, while auction markets for securities have multiple buyers and multiple sellers, all looking to make deals simultaneously.
Double Auction Markets
An auction market is also referred to as a double auction market. It allows buyers and sellers to submit prices they deem acceptable to a list. When a match between a buyer’s price and a seller’s asking price is made, the trade proceeds at that price. Trades without matches will not be executed.
Examples of the Auction Market Process
Imagine that four buyers want to buy a share of XYZ and make the following bids: $10.00, 10.02, 10.03 and $10.06. Conversely, there are four sellers that desire to sell XYZ, and they submitted offers to sell their shares at the following prices: $10.06, 10.09, 10.12 and $10.13. In this scenario, the individuals that made bids/offers for XYZ at $10.06 will have their orders executed. All remaining orders will not immediately be executed, and the current price of XYZ will then be $10.06.
The U.S. Treasury holds auctions in order to finance certain government financial activities. The auction is open to the public as well as to various larger investment entities. Bids are submitted electronically and are divided into competing and non-competing bids, depending on the person or entity who places the recorded bid.
Non-competing bids are addressed first, as non-competitive bidders are guaranteed to receive a predetermined amount of securities as a minimum, up to a maximum of $5 million. These are most commonly entered by individual investors or those representing small entities.
In competitive bidding, once the auction period closes, all of the incoming bids will be reviewed to determine the winning price. Securities will be sold to the competing bidders based on the amount listed within the bid. Once all of the securities have been sold, the remaining competing bidders will not receive any securities.