Auctions: How Winners are Determined

>>[Male voice]: Winners are determined in
a precise and efficient manner in our Security Auctions. Watching
the following sample auction will help you see exactly how it works. Let’s say we have 100 units up for auction
of a 1-Year CD offered by ABC Bank. Each unit is worth $1000 and the
fixed yearly Coupon rate is 3.5%. The yield that winning bidders would receive
if the auction ended at a specific moment is the current market-clearing
yield, and in this auction example it will start at 5.584%. Now, watch as the bids start coming in. Bidder A hopes to get 30 units at 4.5% yield.
Notice our site also calculates the equivalent price. Then Bidder B comes in and bids for 20 Units
at a 4.3% yield. At this point, only a total of 50 units have
been bid for, so the current market-clearing yield still remains at 5.584%. Then Bidder C comes in and bids on 50 Units
at 4.8% yield. Now the total quantity of units being offered
has been bid for. We refer to this as the auction being ‘fully subscribed’. Once
the auction has been fully subscribed, the current market-clearing yield is adjusted
to the highest yield of the best bids that cover all the units. If the auction were to end at this point,
the highest yield at which we could sell the entire amount of units would be 4.8%.
So, that becomes the new market-clearing yield. However, let’s assume the auction is not
yet over. Bidder D comes in and bids for 50 Units at 4.3%. Now the highest yield out
of the best bids is 4.5%. That becomes the new
market-clearing yield and Bidder C is outbid. Bidder E comes in and bids for 30 Units at
3.9%. Now we can sell the entire 100 units at 4.3%, and that becomes the new market-clearing
yield. Bidder A is outbid since the market-clearing yield has dropped below their
bid. Bidder F bids for 70 units at 3.5% yield.
Since they bid for 70 units at a lower yield than
Bidders B & D, Bidders B & D are outbid and 3.9% becomes the new market-clearing yield. Let’s say now we are approaching the end
of the auction. Bidder G comes in and bids for
20 units at 3.4%. Notice that the market-clearing yield remains at 3.9%. Also notice
that Bidders E, F, & G have bid for a total of 120 units. However, we are only offering
100 units. If the auction were to end right now, to whom would the units be allocated? Since Bidder G bid the lowest yield at 3.4%,
they would be awarded their units first and get them for the current market-clearing
yield of 3.9%. Bidder F would be next. They bid
for 70 units at 3.5%, so they get their 70 units also at the market-clearing yield of
3.9%. Bidder E would be last. Since bidders G & F
were awarded 90 of the 100 units available, Bidder E would be left with the remaining
10 units at the market-clearing yield of 3.9%. There is, however, one more bidding situation
to consider. Let’s say Bidder H comes in and
bids for 30 units at 3.9%, the same rate as Bidder E. This IS at the market-clearing yield,
however it is at a later timestamp than Bidder E. So the bid offered by Bidder H is rejected
and Bidder E keeps their awarded 10 units. In review, all winners get their units at
the market-clearing yield, even though they may
have initially bid for a lower yield. Bidders that bid the lowest yield are awarded first.
Then, if bids become competitive at the market-clearing
yield, the remaining units go to those with the earliest timestamp. Keep in mind that if within the last two minutes
of the auction closing, the current market-clearing yield adjusts because of a new bid, then the
auction is extended by two minutes from the time
that bid is submitted to allow more time for auction participants to react to last minute
bids. This can only be done for a maximum of 15
minutes. Our dutch-style auction for securities is
becoming more popular every day because, as you might
see from watching the process, there are 3 potential outcomes for bidders: You can win
all or a portion of your requested units at the yield
you bid; You can win ALL your units at a BETTER yield; or You can win nothing and therefore
pay nothing. Remember, you’ll need a Zions Direct account
to participate in most of our auctions. This can be
done by visiting us at

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