Benefits of auction-based liquidity  

Knowledge Base
Tuesday, June 22, 2021

Benefits of auction-based liquidity  

Auctions are not a new concept – they are used widely in financial markets, betting sites and e-commerce (think eBay) – but they were never widely used in trading unlisted securities.  

Firms providing these markets have typically operated on a traditional "matched bargain" model where they directly match buyer and seller (in contrast to the market maker system where investors buy and sell to market makers).  This approach makes sense for illiquid securities as it would be too risky and unsuitable for market makers to participate.  

However, this traditional approach is not without drawbacks that inhibit (rather than promote) liquidity. Orders that are received are not displayed to participants, and there is no transparency over the:  

1. Range of orders (the difference between the highest and lowest prices entered);  

2. Depth of the market (the volume of shares and number of orders at each price level); and  

3. Pricing and matching process.  

Effective financial markets rely on transparency and feedback loops that inform buyers' and sellers' decisions. Without this, the marketplace is inefficient, unfair, and likely to have pricing anomalies.  

Auction-based liquidity  

The Asset Match market model is built around a strong belief in transparency, fairness, price discovery and independence. Auction-based liquidity is the market model that supports all of these.  

The features and benefits are:  

1. Periodic auctions – Set auction windows that concentrate buyer and seller activity. This contrasts with the "continuous" matched bargain model which is passive. 

2. Auction calendar – The frequency and dates of auctions are agreed with the company to best reflect their underlying liquidity needs and the news flow of the company. At the time of the auctions, buyers and sellers have access to the most up-to-date and relevant company information to make informed decisions. Calendars are flexible and can be modified to best suit the liquidity needs.  

3. Visible order books – All buy and sell orders are displayed in an online order book that is viewable by all participants, along with indicative pricing. This transparency means that all participants have access to the same information.  

4. Price discovery – The auction window allows and encourages a pricing discussion between buyers and sellers. This is crucial for a security that is not liquid and where there is no readily available market price for participants to refer to.  

5. Pricing and matching algorithm – Purpose-built pricing and matching algorithms are used to calculate final auction prices and matches. These algorithms are "non-discretionary" which means that they find a result in all circumstances, no matter how extreme. Asset Match remains independent in the entire auction process and does not favour one participant over another. 

6. Single trading price – Each successful auction calculates a single clearing price at which eligible participants will trade. This is not the case with traditional matched bargain models where, on the same day, trades can be matched with wildly different prices and leave some participants feeling aggrieved.  

The periodic auction-based model uses mainstream market features that are used every day in large public markets and adapt them for use in private markets to the benefit of the companies, shareholders, and new investors.  

Interested in the benefits of auction-based liquidity? 

Our team at Asset Match has decades of experience in financial markets, trading, private equity, advisory and operations. We specialise in advising on the best solutions for private company liquidity from our selection of markets for secondary liquidity and pricing corporate actions.  

Learn more about our market types here or contact us