Auctions: How Winners are Determined

Uploaded by ZionsDirectTV on 13.04.2012

>>[Male voice]: Winners are determined in a precise and efficient
manner in our Security Auctions. Watching the following sample auction
will help you see exactly how it works.
Let’s say we have 100 units up for auction of a 1-Year CD offered by
ABC Bank. Each unit is worth $1000 and the fixed yearly Coupon rate is 3.5%.
The yield that winning bidders would receive if the auction ended at a
specific moment is the current market-clearing yield, and in this auction
example it will start at 5.584%.
Now, watch as the bids start coming in.
Bidder A hopes to get 30 units at 4.5% yield. Notice our site also calculates
the equivalent price.
Then Bidder B comes in and bids for 20 Units at a 4.3% yield.
At this point, only a total of 50 units have been bid for, so the current
market-clearing yield still remains at 5.584%.
Then Bidder C comes in and bids on 50 Units at 4.8% yield.
Now the total quantity of units being offered has been bid for. We refer to this
as the auction being 'fully subscribed'. Once the auction has been fully subscribed,
the current market-clearing yield is adjusted to the highest yield of the best bids
that cover all the units.
If the auction were to end at this point, the highest yield at which we could sell
the entire amount of units would be 4.8%. So, that becomes the new market-clearing yield.
However, let’s assume the auction is not yet over. Bidder D comes in and bids for
50 Units at 4.3%. Now the highest yield out of the best bids is 4.5%. That becomes the
new market-clearing yield and Bidder C is outbid.
Bidder E comes in and bids for 30 Units at 3.9%. Now we can sell the entire 100 units
at 4.3%, and that becomes the new market-clearing yield. Bidder A is outbid since the
market-clearing yield has dropped below their bid.
Bidder F bids for 70 units at 3.5% yield. Since they bid for 70 units at a lower yield
than Bidders B & D, Bidders B & D are outbid and
3.9% becomes the new market-clearing yield.
Let’s say now we are approaching the end of the auction. Bidder G comes in and bids
for 20 units at 3.4%. Notice that the market-clearing
yield remains at 3.9%. Also notice that Bidders E, F, & G have bid for a total
of 120 units. However, we are only offering 100 units. If the auction were to end right
now, to whom would the units be allocated?
Since Bidder G bid the lowest yield at 3.4%, they would be awarded their units first
and get them for the current market-clearing yield of 3.9%. Bidder F would be next. They
bid for 70 units at 3.5%, so they get their 70
units also at the market-clearing yield of 3.9%.
Bidder E would be last. Since bidders G & F were awarded 90 of the 100 units available,
Bidder E would be left with the remaining 10 units at the market-clearing yield of 3.9%.
There is, however, one more bidding situation to consider. Let’s say Bidder H comes in
and bids for 30 units at 3.9%, the same rate as
Bidder E. This IS at the market-clearing yield, however it is at a later timestamp than Bidder
E. So the bid offered by Bidder H is rejected and Bidder E keeps their awarded 10 units.
In review, all winners get their units at the market-clearing yield, even though they
may have initially bid for a lower yield. Bidders
that bid the lowest yield are awarded first. Then,
if bids become competitive at the market-clearing yield, the remaining units go to those with
the earliest timestamp.
Keep in mind that if within the last two minutes of the auction closing, the current market-clearing
yield adjusts because of a new bid, then the auction is extended by two minutes from the
time that bid is submitted to allow more time for
auction participants to react to last minute bids.
This can only be done for a maximum of 15 minutes.
Our dutch-style auction for securities is becoming more popular every day because, as
you might see from watching the process, there are 3
potential outcomes for bidders: You can win all or
a portion of your requested units at the yield you bid; You can win ALL your units at a BETTER
yield; or You can win nothing and therefore pay nothing.
Remember, you’ll need a Zions Direct account to participate in most of our auctions. This
can be done by visiting us at