How Auctions Work
An auction market is an environment that facilitates competition between buyers and sellers. Buyers enter competitive bids and sellers submit competitive offers at the same time. Matching bids and offers are then paired together, and the orders are executed.
An example of an auction market is the London Stock Exchange (LSE), before moving onto how the process work, let’s move on to the types of auctions naming a few.
The first one being the increasing-price auction (English auction), in this type of auction a good or commodity is offered at increasing prices.
The second one being the sealed-bid auction, in this type of auction each party sends a sealed bid to an auctioneer who opens all bids. The auctioneer determines the highest bid and sells the item to that bidder for the bidding price. This type of auction can execute in a single round of communication between the bidders and the auctioneers.
The last one being a buyout auction, in this type of auction, there is a set buyout price that bidders can agree to anytime during the bidding process. If a bidder decides they no longer want to continue bidding for a lower price, they can accept the buyout price. The auction ends with that bidder winning the item and paying the present buyout amount.
What is the Auction Market Process & How does the Auction Market Process Work?
The process is different from one in the OTC market since there is no direct negotiations occur between buyer and seller, the OTC Market will be briefly explained at the end of this article.
The buyers place multiple positions in a market in the desired financial instrument available in the market.
The seller places multiple offers in a market in the desired financial instrument in the market.
The order matching mechanism focuses on putting up the highest bid price from the buyer and the lowest offer price from the seller.
If the highest bid price and lowest ask price are matched, then the trade is executed on that securities, and on this mechanism, the current market price is decided.
If the price of the bid and offer is not matched, then order status remains pending.
An order executed will be processed for settlement as per exchange rules.
In general, the auction has one seller and multiple buyers, however in this there are multiple buyers and sellers.
Continuous process deciding the current market price through this order marching mechanism;
Auction markets also have the term known as a double auction market as it allows buyers and sellers to submit a price, they feel acceptable from a given list of bids and offers. When bid and ask price are matched, the trade will proceed to execution.
Example of the market process:
Let us say two buyers want a share of the company X, and they each make the following bids -
$21, $22 and two sellers wish to sell shares of company X, and these sellers submitted offers to sell their shares at the following prices — $22 and $23 in this instance, the traders who made offers for company X at $22 will have their orders filled. All remaining orders will not immediately be executed, to add a bit of information down below I’ll briefly describe OTC stocks.
OTC stands for ‘Over The Counter’ markets, these are where stocks that aren’t listed on major exchanges such as the NYSE or Nasdaq can be traded, a lot of stocks can be traded over the counter and well over 10000 stocks too
How to buy OTC stocks?
To buy shares of an OTC stock, you’ll need to know the company’s ticker symbol and have enough money in your brokerage account to buy the desired number of shares, and all this can be done with an online broker.
I hope this post adds value to your trading knowledge, that’s it from me on how an auction works.
For more education on the auction process, I recommend The One Percent Trading Group, and I’d like to thank them for contributing to the trading community.
Their YouTube channel that has free content: https://www.youtube.com/c/OnePercentTradingGroup
Website: www.onepercenttradinggroup.com
Written by: Prince (Market Analyst)
One Percent Trading Group
