What it is:
An auction market is a market in which buyers indicate the highest price they are willing to pay and sellers indicate the lowest price they are willing to accept. A trade occurs when the buyer and seller agree on a price.
How it works (Example):
The New York Stock Exchange (NYSE) is one of the world's foremost auction markets. NYSE agents known as specialists act as auctioneers and match up orders in order to promote an efficient market place. For example, if two buyers want to buy a share of Company XYZ for $5 and $5.25 and two sellers want to receive $5.50 and $5 for their shares, then the specialist matches the$5 buyer with the $5 seller, making $5 the current price of Company XYZ stock.
Why it Matters:
Auction markets serve to connect buyers and sellers in the most efficient manner possible.