Wednesday, September 29, 2021
Price discovery in action
We speak a lot about the benefits of auction-based liquidity and, in particular, price discovery.
But how does this work in practice?
Price discovery is the mechanism for buyers and sellers to agree on the price of an asset based on supply and demand. It is particularly important for illiquid securities as there is no readily available reference price for participants to use a benchmark. This is in stark contrast to publicly traded securities which are traded continuously, and which have ever-present price quotes.
A previous auction in Tottenham Hotspur resulted in £445,208 shares trading at 200p per share. This chart shows the evolution of the auction from ten days before the auction close (t1) to the auction close (t10):
If the auction had been open for one day only and without the benefits of price discovery, then c. £13,000 would have traded at 150p per share. This would obviously have been a sub-optimal result.
By allowing the participants to engage in price discovery over an appropriate timeframe, the opening indicative price of 150p per share was able to react to supply and demand – oscillating between 180p and 195p per share – before finding an equilibrium price of 200p per share from t7.
The auction also saw a steady increase in tradeable volume, with the indicative price increasing as demand outweighed supply from t6 to t7. The final day saw consolidation from buyers and sellers at the indicative price which resulted in a further increase in tradeable volume.
At the auction close, the final order book had aggregate orders of c. £1.12m, and supply was covered by c. 1.34x by demand. The price discovery process increased the indicative price by 33% and traded value by 34x!
Find out more
Our auction-based liquidity and price discovery provides genuine market-derived pricing for illiquid securities and protects both buyers and sellers in the process.
If you would like to find out more, then contact us and a member of our team will be able to help.