Finance

Auction Market

Auction Market

A market in which buyers indicate the highest price they are willing to pay and sellers indicate the lowest price they are willing to accept is known as the auction market. Basically, it is a security exchange in which buyers make a bid and sellers make an offer in order to make it. In simple terms, an auction market is a place where buyers and sellers make competitive bids simultaneously.

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How Auction Markets Work?

  1. The buyer places multiple bids in his desired financial instrument available in the market.
  2. The seller places multiple offers for that financial instrument.
  3. The order matching mechanism focuses on putting up the buyer’s highest bid and seller’s lowest offer.
  4. If the highest bid price matches the lowest ask price, the trade is executed on securities, and on the basis of this mechanism, the current market price is decided.
  5. The order status remains pending if the bid and ask price does not match.
  6. This executed order will be processed for settlement as per exchange rules.
  7. This auction market will have multiple buyers and sellers.
  8. Continuous process decides the current market price using order marching mechanism.
  9. There also exists a double market auction as it allows buyers and sellers to submit a price, they feel acceptable from the given list of bids and offers.

How it is different from the Dealer’s market?

Auction Market

Example:

Imagine Alex, Bate, Chloe & Darren wants to buy the shares of company ABC and they make the following bids:

Alex: 20

Bate: 20.25

Chloe: 20.30

Darren: 20.50

Conversely, Ellie, Fenny, Gemma, Harry wishes to sell the shares of company ABC and they submitted their offers at 20.50, 20.55, 20.75, 21 respectively.

In this case, the individuals that made bids/ offers at 20.50 will have their orders executed. All the other orders will not be executed immediately and the current price of company ABC will be 20.50.

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Bottom Line:

With innovation in technology and surveillance policies of various exchanges, the process of auction markets changed from open outcry to electronic trading systems. This market aims to connect buyers and sellers in the most efficient manner. Over time the working has changed but the principles remain the same for all market operations as per the auction market.

Author: Urvi Surti

About the Author:

Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).

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