Dutch auction
Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the last announced price. This is also known as a "clock auction" or an open-outcry descending-price auction.
This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. Theoretically, the bidding strategy and results of this auction are equivalent to those in a Sealed first-price auction.
The Dutch auction is named for its best known example, the Dutch flower auctions.
The term Dutch auction was co-opted by eBay.com to describe a multi-unit ascending auction where several identical goods are sold simultaneously to potentially multiple bidders.
Public offerings
The United States Department of the Treasury, through the Federal Reserve Bank of New York (FRBNY), raises funds for the U.S. Government using a Dutch auction. The FRBNY interacts with primary dealers, including large banks and broker-dealers who submit bids on behalf of themselves and their clients using the Trading Room Automated Processing System ("TRAPS"), and are generally told of winning bids within fifteen minutes.
For example, suppose the sponsor of the issuance is seeking to raise $10 billion in ten-year notes with a 5.125% coupon and in aggregate the bids are as follows:
- $1.0 billion at 5.115%
- $2.5 billion at 5.120%
- $3.5 billion at 5.125%
- $4.5 billion at 5.130%
- $3.75 billion at 5.135%
- $2.75 billion at 5.140%
- $1.50 billion at 5.145%
In this example, the Bid-to-Cover Ratio is 1.95, therefore, not every bidder will receive bonds. Bids will be filled from the lowest yield (highest price) until the entire $10 billion has been raised. This auction will clear at a yield of 5.130 percent and all bidders will pay the same amount. In theory, this feature of the Dutch auction format leads to more aggressive bidding as those who in this case bid 5.115% will receive the bonds at the higher yield (lower price) of 5.130%.
A variation on the Dutch auction, OpenIPO, was used on the IPO for Google stock.
The introduction of the Dutch auction share repurchase in 1981 allows firms an alternative to the fixed price tender offer when executing a tender offer share repurchase. The first firm to utilize the Dutch auction was Todd Shipyards. A Dutch auction offer specifies a price range within which the shares will ultimately be purchased. Shareholders are invited to tender their stock, if they desire, at any price within the stated range. The firm then compiles these responses, creating a supply curve for the stock.[1] The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of shares tendered exceeds the number sought, then the company purchases less than all shares tendered at or below the purchase price on a pro rata basis to all who tendered at or below the purchase price. If too few shares are tendered, then the firm either cancels the offer (provided it had been made conditional on a minimum acceptance), or it buys back all tendered shares at the maximum price.
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Notes
- ^ To understand the Dutch auction bidding and outcome from actual shareholder tendering responses, see Bagwell, Laurie Simon, "Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity,". 1992. Journal of Finance, Vol. 47, No. 1, 71-105.