What is an Auction Market? | Definition and examples


A market where interested buyers and sellers engage in ambitious bids and offers (asks) is called an auction market, i.e. when interested buyers and sellers come together to bid for an asset.

The buyer is interested in paying the highest price, which reflects the security trade, and the seller must be interested in the lowest price to sell.

Auction market in a nutshell

  • Price Dynamics: In auction markets, buyers aim for the highest price and sellers for the lowest.
  • Market Example: Major markets such as the NYSE use electronic matching for transactions.
  • Auction Varieties: On-spot, online, and sealed bid auctions.
  • Binary Options: Binary options are different due to OTC platforms.

When the bid and the offer price are matched, the trade is implemented at a price. An auction market differs from markets in which trades are bargained, such as an OTC market. If you want to learn more about OTC markets, take a look at our definition & examples of OTC. Auction is used on many sites, like in initial public offerings (IPOS). The form of auction utilized in IPOs is known as Dutch auctions. 

Auctions are employed in several stock exchanges all over the world. In its most basic form, an auction is a spot in which the highest possible price is evaluated by purchasers, and the lowest price is evaluated by sellers to make a purchase for a market organization or product. When the buyer and seller both agree on the defined price or amount, the transaction will be executed only.

A systematic method of establishing a strong relationship between buyers and sellers in the auction market. An example of an auction market is the New York Stock Exchange (NYSE). Trades on the exchange will be conducted after an offer and bid are matched.

Open outcry auction marketplaces, where buyers and sellers would announce prices on the trading floor, were once used to organize deals. 

What is dynamic execution on electronic auction markets?

Dynamic execution on electronic auction markets refers to the automated process of matching buy and sell orders in real-time, adjusting instantly to market conditions.

In an electronic auction market, trades are typically matched and executed immediately. If bid and offer prices don’t align, the trade remains pending until a matching bid and ask price is found. This process facilitates efficient trading across multiple buyers and sellers.

An auction market platform often uses “market makers” to provide liquidity. In theory, an auction market operates on the idea of ‘fair prices’—points where buyers and sellers agree—versus ‘unfair prices,’ which the market quickly moves away from.

Examples of the auction market

  1. On Spot Auction: This type of auction is also known as the on-site auction, where buyers and sellers are conducting in a meeting facility or room like in a public place, and the interested bidders have over-seed the auctioned goods. When the bidding procedure is officially publicized, the items for sale are displayed.
  2. Online Auction: Through the internet, bidders compete on a specific product; after that, they submit their bids during online auctions. Internet auctions have become very popular nowadays because of the flexibility and possibilities which they provide the bidders.
  3. Sealed Bid Auction: Some bids are very confidential, so the bidders used this type of auction. When a seller considers optional terms of sale, a sealed auction is frequently used.

How does the auction market work?

An auction market works by matching buyers and sellers based on their bid and ask prices. Before they start an auction, they must be allowed to examine and check the items on sale. When interested in putting a bid, the qualified purchasers must first register with the auctioneer before seeing all the products. An auctioneer’s duty is to take all the personal details from all the interested bidders before the auction starts. 

Each registered bidder receives a bidder card with a number on it that is used to track all bids. Then the auctioneer gives a description of the display item for sale. The bidders start bidding; if any seller or bidder or his agent pretends to bid for the items purposely to raise the bid price of the item, the buyer of goods has the right to treat the sale as void. 

In numerous instances, competitive bidding is also allowed between the buyers who buy the bank to raise the value of the auction property for sale. 

Under the sale of Good Act, 1930, an auction sale is covered. Auctions can be formed in many ways like agriculture, artwork and antiques, second-hand goods, and farms and buildings repossessed by the bank or the government.  

Is there an auction market for Binary Options?

Compared to traditional assets, binary options work differently, meaning that the concept of auction markets cannot be applied directly to them. Binary options are offered via over-the-counter (OTC) platforms, where traders bet on price movements.

Compared to traditional auction markets, in which prices are driven by supply and demand, the prices of binary options are influenced by factors like the underlying asset’s price, the option’s expiry time, and the market’s volatility.

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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