Auction Market

System by which securities are bought and sold through brokers on the securities exchanges, as distinguished from the over-the-counter market, where trades are negotiated. Best exemplified by the New York Stock Exchange it is a double auction system or Two-Sided Market. That is because, unlike the conventional auction with one auctioneer and many buyers, here we have many sellers and many buyers. As in any auction, a price is established by competitive bidding between brokers acting as agents for buyers and sellers. That the system functions in an orderly way is the result of several trading rules: (1) The first bid or offer at a given price has priority over any other bid or offer at the same price. (2) The high bid and low offer "have the floor." (3) A new auction begins whenever all the offers or bids at a given price are exhausted. (4) Secret transactions are prohibited. (5) Bids and offers must be made in an audible voice.

Also, the competitive bidding by which Treasury bills are sold. See also Bill; Dutch Auction.

System by which securities are bought and sold at the best possible price through competitive bidding. Prices are established by brokers acting as agents of buyers and sellers, as well as principal dealers acting for their own accounts. In the securities market, the best example is the New York Stock Exchange, where buyers and sellers make competitive bids for exchange listed securities by submitting order tickets to the exchange. The commodity futures market where interest rate fixtures are traded, is in contrast, an open outcry market, where market prices are set by direct interaction of exchange members, standing in a pit on the trading floor.

The U.S. Treasury Department sells new issues of Treasury bills on a Discount Yield basis through competitive auction bidding in which the price of bills offered for sale is gradually lowered, starting with the lowest yield (and highest price) until the entire amount being offered is sold. See also Competitive Bid; Dutch Auction.