How auctions work: the technical stuff

This page is for anyone that wants to know a bit more about how the auctions set the fair price for financial products and how we calculate which bids and offers are successful and which aren’t.

The key to this is the ‘order book’ which is securely recorded on our platform. The following rules apply to all auctions unless the auction information page specifies different rules. For example, where a business is raising capital by selling newly issued financial products, they may choose to set a fixed price per financial product rather than let supply and demand set the price.

Priority bids and offers

Bids and offers are given priority based on the competitiveness of their prices and the time at which they were submitted.

Bids to buy at a higher price are more likely to be successful than bids at a lower price.

Offers to sell at a lower price are more likely to be successful than offers at a higher price.

For bids or offers submitted at the same price, the bid or offer submitted earlier in the auction has priority, so is more likely to be successful.

Partial trades

It is possible that some bids and offers will trade in part, which means the investor will buy or sell a smaller number of financial products than the maximum amount indicated in their order.

Example

Post-closing bids or offers

When the auction has closed, if there is an imbalance between the number of financial products wanted by buyers, at the provisional closing price, and the number of financial products offered for sale at that price, we may continue to allow additional orders at the final auction price, solely to reduce any order imbalance.

If additional orders are to be accepted to reduce the order imbalance, investors will be notified of this on the information page for the relevant financial products, which will indicate how long these orders may be accepted.

Example

The order book

The order book is the total collection of all valid bids and offers submitted during an auction period. It is used to calculate the final price to be paid for financial products. Bids and offers are recorded based on the time they are submitted and the price at which the investor is prepared to buy or sell.

The fair price for the financial products is calculated using the following process:

1

Step 1

The algorithm looks to see what price(s) would cause the maximum number of financial products to trade.

2

Step 2

If there is more than one price at which the same maximum number of financial products would trade, then the algorithm selects the price(s) within this range, where the ‘order imbalance’ is minimised (the difference between cumulative bids and offers).

3

Step 3

If there is more than one price at which the order imbalance is minimised, then:

  • If there is excess buyer demand at all these prices, the algorithm selects the highest of these prices; or
  • If there is excess seller demand at all these prices, the algorithm selects the lowest of these prices.

4

Step 4

If there is more than one price at which the order imbalance is minimised, but there is excess buyer demand at one or more of these prices, and also excess seller demand at one or more of these prices, or zero order imbalance at more than one of these prices, then the algorithm selects the price, within this range, that is closest to the price the financial products most recently traded at, in an auction.

5

Step 5

If step 4 fails to set the price because the financial products have not previously traded in an auction, then the algorithm selects the lowest of the prices at which order imbalance is minimised, and at which there is either zero order imbalance or excess offer (seller) demand.

Example