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What Is an Auction Market? (Overview)

Last Updated on 10 February, 2024 by Rejaul Karim

An auction market is a platform for buyers and sellers to meet in the hope of securing favorable transactions. These transactions can occur for any type of asset such as gold, stocks, and bonds. Furthermore, auction markets are often defined by transparency and openness. 

Transparency means that every participant in the market knows about the price at which an asset was sold. Access means that all the participants can place bets for an asset and the person with the highest bet wins the auction. Auction markets can be digital or physical.

Stock exchanges like the New York Stock Exchange (NYSE) is an auction market,

Getting a sense of the nature of markets allows us to get into the details of the functions of markets.

Auction Market
Auction Market

What is the Process of an auction market?

An auction works via the interaction of buyers and sellers. The sellers of an asset will quote the minimum price they are willing to accept and then the buyers will place their bids.

If the bids are lower than the minimum asking price, then auction will have no transactions. On the other hand, If the bids are higher than the seller’s price, the transactions will take place. Generally, between two buyers, the highest bidder will get the asset.

Usually, in asset markets, the buyers are investors and therefore the bid price represents the investor’s expectation of returns. The more the expected returns, the higher the bids for the asset.

How the US Treasury Department Uses an Auction Market?

The US Treasury Department System for auctioning of government debt is a good real-world example of an auction market. The US government regularly faces budget deficit. Subsequently, the Treasury Department sells debt-based assets such as Treasury bills (T-Bills), bonds and notes to finance its operations. A majority of these assets are sold via a digital auction market such as TAAPS (Treasury Automated Auction Processing System).

Types of investors in the Auction market

TAAPs allows both small and large investors to take part in this auction. Large investors (or primary dealers) include typical institutions such as banks, brokers, different types of funds, insurance companies in addition to other players such as foreign governments and non-profit organizations. Furthermore, some designated investors are expected to bid a certain amount in every auction.

Small investors may buy these treasuries through TreasuryDirect. Buying from Treasury Direct helps small investors save on commission and brokerage fees.

Actual bidding step 1: Public Announcement

First, Every bid begins with a public announcement. This announcement is usually made several days before the auction happens. Moreover, this announcement will contain vital information related to the auction which includes the following items:

  • Treasury amount to be sold
  • Auction date and time
  • Terms and Conditions of the auctions
  • Maturity date and interest rate for the asset.

Note: Small investors can look for these announcements at TreasuryDirect website.

In addition, T-Bills are issued on a calendar basis. The dates for different maturity T-Bills are as following

Time Period Frequency of Issuing of Bills
4-week bills Weekly (Tuesdays)
13-week and 26-week bills Weekly (Mondays)
52-week bills Every 4 weeks (Tuesdays)
2-year notes Monthly (End of month)
3-year notes Monthly (Middle of month)
5-year notes Monthly (End of month)
7-year notes Monthly (End of month)
10-year notes Monthly (Middle of month)
30-year bonds Monthly (Middle of month)
5-year TIPS Three times per year (Apr, Aug, Dec)
10-year TIPS Bimonthly (Jan, Mar, May, Jul, Sep, Nov)
30-year TIPS Three times per year (Feb, Jun, Oct)
2-year FRN Monthly (End of month)

Actual Bidding Step 2: Investing as a competitive and non-competitive bidder

Generally, after an announcement, an investor can invest as a competitive or non-competitive bidder. However, small investors always invest as non-competitive bidders. As a result, small investors cannot invest more than $5-milllion in a single auction. In addition, non-competitive bidding usually closes before competitive bidding.

A non-competitive bid means that an investor buys bonds without having to submit a price. Instead, the investor gets to pay the average price of the submitted competitive bids.

Before the closing time of the auction for competitive bids, every investor will submit the amount that they will buy and the yield (interest rate) that they will demand for that investment amount. So different investors can have the following bids:

Name Yield Demand Amount
Bidder 1 3.15 $ 5 million
Bidder 2 3.25 $ 1 million
Bidder 3 3.5 $ 3 million


Actual Bidding Step 3: Bid Approval by TAAPS.

Once the bids have been placed, then the online bidding software (TAAPS)  will accept bids on the basis of minimizing national debt. This is done through selecting the bidders with the highest price (lowest yield demand) first and then working its way down the bidder’s list. The last yield rate on the bid that was required for all of the bonds to be sold, is the one that applies to all non-competitive bidders.

Is OTC an Auction Market?

An Over the Counter (OTC) market is different to an auction market. One of the main differences is that an OTC market often involves negotiations while auction markets have simple listings of minimum acceptable prices and bids for those assets. If the bids match, the transactions go through and otherwise there is no bargaining between the sellers and the buyers.

If you enjoyed this article you might also like our other articles answering common questions traders have!

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