Auction market definition

What is an auction market?

An auction market is an environment that facilitates competition between buyers and sellers. In an auction market, buyers indicate the maximum price that they are willing to pay for an asset, while sellers express the lowest price that they would be comfortable accepting.

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Types of auction

The type of auction an exchange would hold depends on the time of day, and the principles of supply and demand. In general, there are three different types of auction:

  • Opening auctions. These determine the opening price of an asset on an exchange, by matching buyers with sellers. The most commonly-traded figure becomes the price at which the asset opens on the market
  • Intraday auctions. This type of auction is held throughout the day to match buyers with sellers, and set the price of an asset in accordance with how in demand it is within that session
  • Closing auctions. These are held at the end of the trading day to determine an asset’s closing price, before the market closes and reopens the following morning

What is the auction market process?

The auction market process involves finding a counterparty for a particular transaction. This is carried out by specialists who work for an exchange, often known as auctioneers. In an on-exchange transaction, auctioneers act as a middle man between buyers and sellers. Their role is to match two parties that have listed the same or a similar price for an asset.

This differs from trading over-the-counter (OTC), where the two parties of a trade will directly communicate in order to reach a consensus on a buy and sell price.

Auction example

Let’s say that three buyers were filling orders for shares of company ABC, with buy prices of £5, £5.30 and £5.60 respectively. Meanwhile, three sellers had submitted offers to sell their shares of ABC for £4.40, £4.70 and £5. In this case, an auctioneer would match the £5 buyer with the £5 seller and the trade would go through. This would set the current market price for that stock at £5.

Once this has happened, the buyers and sellers who put forward the other prices would readjust their values to trade at the price set by the auction at £5.

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