Dutch Auction Explained
Dutch Auction is an auction process where the auctioneer starts with a high asking price and then lowers in it stages until there are enough bids to sell the entire offered quantity. This type of auction is common in initial public offerings to find the optimum price for the full quantity of stocks offered in that round.
A Little More on the Dutch Auction Process
The investors submit their bids stating how many shares they are willing to buy and the price they want to pay for it. After collecting all the bids, the auctioneer assigns the shares to the bidders from the highest bid down until all the shares are assigned. The price paid by each bidder is based on the lowest price of all allotted bidders or the last successful bid. For example, someone bids $100per share for 10,000 shares, and the last successful bid is $90 per share, then he or she needs to pay $90 per share for 10,000 shares.
During bidding the auctioneer starts with a prohibitively high price for the offered securities. For example, he sets it to $100 per share. Then he lowers into $90 per shares and receives two bids for 5,00,000 shares. Then he again lowers the price to $85 per shares and receives bids for 4,000,000 shares. Then he further lowers it to $80 and attracts 5,000,000 shares worth of bids, then the auctioneer lowers the price to $75 and gets another 3,000,000 in bids before the auction closes. Then the auctioneer calculates the highest price at which all shares will be sold. The highest bids adding up to 10 million shares are the winning bids. Then the lowest winning price bid on those 10 million shares (in this case $80) is set as the price of all shares and all the winning bidder pay this price. The ones who offered $90 or $100 will also pay $80 for their share. The bids are compared only after the closing of the auction.
The U.S. Treasury uses this method for auctioning their securities. The bidders bid online through Treasury Direct or Treasury Automated Auction Processing System. The bids are accepted up to 30 days in advance of the auction.