Businesses on the Catalist Public Market are required to provide comprehensive information before each auction, so that investors have everything they need to make good investment decisions. Information about each business, and their financial products, can be accessed via the Market page. Investors should review this information before submitting bids or offers in an auction.
The auction process
Capital raising auctions usually have a fixed price at which the business is selling newly issued financial products. Investors submit orders and have priority on a first-come-first-served basis. For secondary market auctions, where the price is usually set by the total of all supply and demand, we have additional protections built in to make sure the trading is fair, orderly and transparent. Secondary market auctions follow the following process:
Auction pre-open
Auction open
When an auction is open, investors can submit bids (to buy) and offers (to sell) the relevant financial products. Investors can also amend or cancel bids and offers, during this period.
The indicative price of the financial products will be displayed on the business’s auction page, in real time, for the duration of the auction. The price will be based on the total supply and demand submitted into the order book from all buyers and sellers – and will give investors an indication on whether their bids and offers would be successful. Investors can also see whether their current bid or offer would be successful by checking their dashboard. This information is only indicative and investors will be notified of the final closing price, as well as successful bids and offers, when the auction has closed.
The start and end time of the open period will be clearly displayed on the relevant auction page. The length of the open period will differ between auctions, but could be a couple of days, or a couple of weeks.
The open period will not end any earlier than the displayed end time, but we may extend this period, if necessary, to ensure auctions are fair and orderly. For example, the open period will be automatically extended if significant orders are submitted within the last 15 minutes and the end time is randomised by a few minutes.
Any bids or offers not cancelled before the end of the open period will be binding and investors will be legally obligated to complete the transaction, if their bid or offer is successful.
Auction pre-close
During the pre-close period, only investors who submitted a bid or offer in the open period can improve their bid or offer – no new bids or offers are allowed and orders cannot be reduced or cancelled. This allows investors to react to any late bids or offers, with the knowledge that those bids and offers can’t be cancelled at the last moment.
Bids and offers can only be improved by a maximum of 10% (price and/or volume) and if an investor wishes to improve a bid, in particular, we need to have received their pre-payment for their existing bid first. Pre-payments only apply to bids, not offers.
A business’s auction page will display the expected time for the pre-close period to end. The pre-close period might last one day, for example. If significant bids or offers are added in the last fifteen minutes of the pre-closing period, we may extend the period to allow investors to react to those new bids or offers. The pre-close period can be extended as many times as is necessary to ensure a fair and orderly market. The end time is also randomised by a few minutes to avoid manipulation.
Although investors are not entitled to cancel bids and offers during the pre-close period, we reserve the right to allow cancellation or amendment, at our discretion, if an investor promptly contacts us and can show the bid or offer was a genuine mistake.
Auction close
Provisional auction results are made available after the auction has closed. Investors with successful bids or offers are legally obligated to complete their transaction and we may complete the transaction on their behalf.
If for any reason, an investor does not honour their bid, we may either cancel that investor’s bid (in whole or in part) or transfer that investor’s bid to another person. If the bid is cancelled, we will recalculate the results of the auction. This may affect the final price of the financial products, or which bids and offers are successful.
If an investor has only part-paid for their bid, we may choose to accept part of that bid and cancel the remainder, so the bid effectively becomes a bid for a smaller volume, at the same price.
We will notify auction participants when the results and all transactions are finalised. After we have confirmation that all payments due from successful bidders have been paid, we will:
- Update the legal register of title for the financial products
- Pay the relevant purchase price (less any fees) to the successful sellers
- Update investors’ online accounts to reflect their new holdings
- Repay any funds held in relation to unsuccessful bids
- Publish any significant changes in ownership or notices that we receive from directors, senior managers and people who have a substantial holding in the business (applies only to listings on the Catalist Public Market)
This settlement process is completed in accordance with our Electronic Transfer System Rules.
We aim to make payments to all sellers within 5 business days of the end of the auction, although this is subject to receiving cleared funds from the buyers.
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
The table below shows, for an auction, all the bids to buy a financial product (column B), and offers to sell (Column D), for each possible price (column A). Column C shows the cumulative demand to buy at each price, and column E shows the cumulative demand to sell at that price.
*Prices between 633 and 611 have been omitted. This table is from the paper “The Influence of Call Auction Algorithm Rules on Market Efficiency” by Carole Comerton-Fordea.
Step 1
A maximum quantity of 1000 financial products would trade, if the price was set between $6.10 and $6.39 (see column F).
Step 2
The order imbalance would be minimised at 500 if the price was between $6.35 and $6.39 (see column G).
Step 3
There are excess buy orders (1500) over sell orders (1000) for all price levels between $6.35 and $6.39, therefore the algorithm selects the highest of these prices. The price for all financial products traded will be $6.39
Step 4 & 5
There is no need for the algorithm to consider step 4 or 5.
Priority bids and offers
For all limit orders, 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.
Auto bids and auto offers are prioritised based on the limit orders that are submitted into the order book pursuant to the auto bid or auto offer. Auto bids and auto offers update their prices in the order they were submitted, so the first in time retains priority if bidding at the same price.
Updating existing orders
If you update an existing bid or offer, the time priority of that bid or offer will be reset (unless the only change is a reduction in the volume of a limit order and the limit price remains the same – in which case the order will maintain its original time priority).
Increasing existing orders
If you want to increase the size of an order at the same limit price without losing the time priority of your existing order, you can do this by submitting an additional order at the same price, for the incremental increase in volume, instead of amending your existing order. Make sure you select the option to submit an additional order rather than replacing your previous orders.
Auto bids and auto offers
Use the auto bid or auto offer function to automatically improve your bid or offer, if it is outbid, up to your specified best price.
When you submit an auto bid or auto offer, your price is submitted as a standard limit order. If your price is outbid, it is automatically withdrawn and re-submitted at incrementally better prices, up to your specified best price. This means your best price won’t necessarily be submitted immediately into the order book – only the price that is sufficient for your order to trade to the maximum extent possible.
If there are no existing orders that your auto bid or auto offer could trade with, nothing is submitted into the order book until there is an order it can trade with. If your auto bid or auto offer is outbid at its best price, it will remain in the order book at its best price, unless you withdraw it, as new orders could be submitted that allow your order to trade in whole or in part.
Investors only see the limit orders that are actually submitted into the order book. No one else sees the details of your auto bid or auto offer best price.
EXAMPLE
Ben submits an auto bid to buy 10,000 shares at a best price of $1.20 per share. Based on the current auction order book, if the auction were to close at that moment a limit order bid for 10,000 shares would successfully trade in full at $1.01, but would not trade in full at $1.00.
Ben’s order is therefore submitted into the order book as a limit order for 10,000 shares at $1.01, and other investors will be able to see this anonymous limit order at $1.01 in the order book.
If other more competitive bids are submitted that cause Ben’s order not to trade in full, his limit order is withdrawn and replaced with an improved limit order, for example it might improve to 10,000 shares at $1.03. Ben’s order will continue to be improved if necessary, up to the maximum of 10,000 shares at $1.20.
The pros and cons of auto bids and auto offers
Auto orders allow you to ‘set and forget’. There’s no need to log in to the auction when it’s closing to try to outbid other investors.
If you submit an auto order, a later limit order at the same best price may take priority over your order if the price submitted into the order book for your auto order had not reached your best price before that limit order was submitted.
Auto orders can help to avoid disorderly pricing that could result from an investor submitting a very aggressively priced order – the investor is likely to receive better pricing and there are less likely to be unfair price fluctuations using auto bid and auto offer.
For this reason, if you wish to submit a bid to buy financial products at a price much higher than the expected price, or you want to offer to sell financial products at a price much lower than the expected price, we may require this to be done by an auto bid or auto offer rather than by a limit order.
Don’t worry – other investors won’t be able to take higher priority by submitting a limit order, because we will require all investors to use auto orders based on the same thresholds.
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
Catalist’s auction algorithm sets a price for shares in ABC Limited at $1.10 per share. At this price, sellers were willing to sell a total of 10,000 shares, but there were 3 investors who submitted bids to buy a total of 12,000 shares:
Aroha submitted the first bid to buy 5,000 shares at $1.10 (or below). Ben submitted the second bid, to buy 2,000 shares at $1.15 (or below). Colin submitted the last bid, to buy 5,000 shares at $1.10 (or below).
Ben’s bid is the highest price, so he trades first. Ben will purchase the 2,000 shares he wants at the price of $1.10 per share (Ben gets a better price than the maximum he was prepared to pay).
Aroha and Colin’s bids were at the same price, but Aroha’s bid was first in time, so she gets priority. Aroha will purchase the 5,000 shares she wants at $1.10 per share.
Colin will purchase the remaining 3,000 shares at $1.10, but he won’t get the full 5,000 shares he was prepared to buy.
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
At the end of the pre-closing period, the auction algorithm sets a price for shares in ABC Limited at $1.10 per share. At this price, sellers were willing to sell a total of 10,000 shares, but buyers were willing to buy a total of 12,000 shares. This means there is an order imbalance of 2,000 shares, with excess buyer demand.
We may accept additional offers to sell up to 2,000 shares at the auction price of $1.10.
We may not accept any further bids to buy the financial products, or offers to sell at a price other than the final auction price of $1.10. We may not accept additional offers to sell more than 2,000 shares, because that is the level of the order imbalance.
