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Auction Market Participation
What is Auction market?
An auction market is a place where buyers and sellers convene at a site and announce the rate at which they are willing to sell or buy securities. They offer either the ‘bid' or ‘ask' prices, publicly. Since all buyers and sellers are convening at the same place, there is no need for investors to seek out effective options. Everything is announced publicly, and interested investors can make their choice quickly.
What is Dealer Market?
In a dealer market, none of the parties convenes at a common location. Instead, buying and selling of securities happen through electronic networks which usually fax machines, telephones or custom order-matching machines.
Interested sellers deliver their offer through these mediums, which are then relayed over to the buyers through the medium of dealers. The Dealers possess an inventory of securities and earn their profit by selling. A lot of dealers operate within this market, and therefore, competition exists between them to deliver the best offer to their investors. This makes them provide the best price to the investors. An example of a dealer market is the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
How does Auction work?
The broker purchases short position from buy-in auction on T+2 days and settlement takes place on T+3 days.
Auction is successful:
- The trader who defaulted on delivery will have to pay Actual auction price + Brokerage + Penalty (depends on broker).
Auction is unsuccessful:
- The buyer gets a full refund.
- The transaction is cancelled, and the defaulted trader has to pay the highest price prevailing from the day of trading (T) up to a day before the auction day OR 20% above the official closing price on the day before auction day, whichever is higher.
The Auction market process:
A conventional example of an auction market is the New York Stock Exchange (NYSE).
Auction markets vary from one counter to another and trades are also negotiable at that place. NYSE is one of the world's leading auction markets. For example, suppose ten buyers want to buy a share of a company called ABC and make bids at Rs 10, Rs 20, Rs 30, Rs 40 till Rs 100.
On the other hand, ten sellers seek to sell the same shares at Rs 15, Rs 25, Rs 60, and Rs 120. Here, the transaction between the buyer and seller that made bids/offers for ABC company shares will be Rs 60, with the minimum price of shares being at Rs 60.
