DUTCH AUCTION

Auctions are systems that allow determining the price of a product or service that the claimants are willing to pay at the most, thus approaching the ideal situation in the perfect market. In this work we detail the Dutch Auction placement mechanism, widely used both nationally and internationally.

Key Words: Auction. Value title. Bonds.
ABSTRACT The auctions are system which let us determine the prize of the product or the service of the demands who are express their maximum payment. These auctions approach the perfect market. In the present work gives details about the mechanism of collocation of the dutch auction utilize now national and international.

One of the ways of placing a movable value (Shares, bonds, etc.) is through auction, which can be:

According to the order of arrival of purchase orders, used when the price conditions of the placement are predetermined , until demand meets supply.
Demand book, where all interested parties register their purchase orders or purchase intention, in the registry determined by the issuer. In the event that demand exceeds supply, the securities to be awarded are prorated among all interested parties. The placement price, as in the previous case, is predetermined by the issuing company.
Simple or discriminatory auction, the securities are awarded between the claimants that offer the highest prices, each being charged the price offered by them, and the
Dutch Auction, as well as in the discriminatory auction in which the titles are placed among the bidders that They offer the highest prices but are sold at a single price, this being the one that corresponds to the bidder that offered the lowest price within the group of bidders with the highest prices.

DUTCH AUCTION MECHANISM

In the Dutch Auction, the variables to be auctioned are normally the nominal value of the security, in the case of bonds, alternatively the variable to be auctioned may be the coupon (interest rate), it is worth mentioning that the issuing company of the securities sets securities minimum referentials for the nominal value and in the case of the interest rate you can set maximum values, all this in order to guarantee minimum or maximum prices as the case may be.

In the current year, the Peruvian State has placed sovereign bonds in the international market (New York Exchange) for approximately US $ 500 million, auctioning the bond’s interest rate with the Dutch Auction modality and in March the amounts and characteristics of the Fifth Tranche were established of the 2002 Sovereign Bond Issue Program, through Directorial Resolution No. 007-2002-EF / 75-01 (Published in the Legal Norms of the newspaper El Peruano on 7-3-2002), which authorizes the General Directorate of Public Credit of the Ministry of Economy and Finance to issue bonds in the Peruvian market, being the variable to auction the bond price and the Dutch Auction modality. And on March 27 the sixth tranche of sovereign bonds was placed in the local market,

The Dutch Auction contemplates that the bids are presented in a sealed envelope, or the route that is determined, in which the bidder details the number of securities that he wishes to subscribe and the price offered.

In the event that the variable to be auctioned is the nominal value of the security, and once the bids are received, they are made public and ordered in descending order according to the price offered.

The award is made sequentially, starting with the highest priced purchase offer and continuing with the one that follows in descending order of prices, until all the securities offered are awarded. The settlement price corresponds to the last bid awarded.

The number of securities awarded to each bidder is made according to one of the following alternatives:

to. If the last offer exactly meets the total available titles, the number of titles awarded to each bidder will be the same as the one requested.

b. If the offers exceed the number of shares offered, the bidder that within the group of successful bidders presented the lowest offer, will receive only the number of titles that complete the auctioned amount and not the full amount that said bidder requested.

c. If the bids received at prices above the reference price were for a lower number than the total number of auctioned shares, shares will be awarded to all bidders who offered prices equal to or greater than the reference price. The balance of the securities will be awarded to the placement agents (Banks, Stock Brokers, etc.) at the reference price if they have been contracted with these last agents in the form of underwriting (commitment).

Let’s see an example. The real estate company Armando Casas SAA wants to place 5 million common shares whose nominal value is SI. 5.00; the variable to be auctioned will be the value of the share and the base price has been established at S /. 10.00 per share, which is the minimum price that the real estate company accepts, otherwise the offer will be canceled. 

Suppose that six bidders with seven purchase orders were presented, below we present the result according to the mechanism of the Dutch Auction:

Bidders Offer Award
Number of actions Price
TO 2500000 14.80 YES (price) lower
B 400000 16.00 yes
C 100000 15.00 yes
D 1500000 16.10 yes
E1 4000000 12.30 NO
E2 500000 17.50 YES (price) higher
F 2000000 10.00 NO


Consequently, the entire 5 million shares will be awarded to S /. 14.80 each and according to the following detail:

Bidder Number of shares awarded.
E2 500000
D 1500000
B 400000
C 100000
TO 2500000

 

In the case of non-financial products, for example footwear, Customs auctions, etc., the auction mechanism can be applied, which could have the following variants:

to. Traditional auction through which buyers set the price through competitive offers.

b. Reverse auction in which the seller sets the price with the buyer specifying the requirements, the sellers make their offers and the lowest price takes the order.

c. Dutch auction in this case the seller offers the item at successively lower prices, until the offer is convenient for the company or the price falls so much that it forces the item to be withdrawn. For example, Maquicentro-Fll to sell its footwear begins with a price lower than the value of the normal catalog and then it decreases in decreases of 10% every three days, until the shoe is sold or the price drops to 60% with what which offer is withdrawn.

CONCLUSIONS

A mechanism to set the prices of any product or service is the auction, with the Dutch auction being a variant.

The Dutch Auction is a mechanism widely used in the most advanced financial markets and constitutes a method known and accepted by the main investors in the world.

In our country, the Dutch Auction has been used for many years in the placement of corporate bonds and in the privatization processes in the sale of the shares that the State had in companies.

The growth of the Internet makes it possible to apply pricing models driven by the same customers, which in terms of personalization of prices auctions and in particular the Dutch auction are very close to the ideal situation in which each customer pays exactly the maximum of what you are willing to spend.

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