We all have a good idea how an auction runs. Bid is put in, a higher bid is put in, then a higher one, and so on and so forth until best bid wins. Perhaps there’s a reserve price to be met, or no reserve at all. This is the standard model is most often used around the world, and the model we most likely associate with an auction. What if I told you that that’s not always the case?
The Less Famous Dutch Auction
As we mentioned, typical auction starts at the first bid and increases from their. Dutch auctions, however, work in reverse. They tend to start at a high bid, often above the fair price. Then the price is lowered and steps bit by bit, and when a bitter biceps the price may make a bid. All bids are hidden from the bidder until that bid is formulated. Winning bid is the highest amount, and the auction ends. It’s as simple as that.
Such Auctions Work Great For Public Offerings
With public offerings, such auctions look a little bit different. In this case, investors give their bids for the number of shares they want and the price they’re willing to pay for those shares. So while one bidder may be willing to pay $150 per share for 200 shares, another bidder may be willing to pay $140 for 500 shares.
Once all the bids are in, allotted placements are assigned to the bidders in the highest bids on down, fill all of the shares are assigned. However, what each bidder pays is based on the lowest price I was bid, which is usually the less successful bid. So even if your bid is $150 per share, you will only have to pay hundred and $40.
Still An Auction Used To This Day
Despite the reverse nature of this auction system, very prominent outlets use the system to this day. One very noticeable example would be the U.S. Treasury, which uses Dutch auctions to sell treasury T-bills and bonds. Through the treasury automated auction processing system, or TAAPS, U.S. Treasury can accept bids up to 30 days before an auction. In these Dutch auctions, it’s with the lowest yield typically are the first to be accepted, as those are easier to pay to its bond investors. Any bids over a predetermined yield limit will often be rejected.
The Good and The Bad
All traditional auctions can seem exciting to see how high the number will go, Dutch auctions tend to be more of a test of nerves. In theory, you can hold out for too long and lose the sale. Conversely, you can jump too soon when you could’ve had much lower price. You just never know, and this is where research really helps.
Dutch auctions strongly require you to do research on the items that you’re interested in that you have a better understanding of what the average cost of those items are. Ultimately, should always remember that if the price is too good to be true, then don’t expect that price to be the winning bid.