What is an Auction Market?
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 an Auction Market Works
Though most of the trading is done via computer, auction markets can also be operated via open outcry, whereby buyers and sellers physically call out prices to each other.
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 an Auction Market Matters
Auction markets serve to connect buyers and sellers in the most efficient manner possible. They also simplify the buyer/seller exchange process as auction markets do not involve direct negotiations between individual buyers and sellers.