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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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:
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.
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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