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Auction definition
An auction is a market mechanism where buyers and sellers compete to trade an instrument by submitting prices. Buyers submit bid prices, sellers submit offer prices, and the market matches orders where supply and demand meet.
In trading, auctions set a price through price discovery. An exchange may run an auction at the market open, the market close, or during special trading periods to collect orders and settle on a single execution price.
An auction also describes the broader way markets operate. When buying pressure exceeds selling pressure, price tends to rise; when selling pressure exceeds buying pressure, price tends to fall until the market settles at a new balance.
Auction Example
A stock exchange runs an opening auction before regular trading begins. While the market is still closed, buyers and sellers submit orders on both sides:
- Buyers bid for shares at prices up to USD 50.20. - Sellers offer shares at prices down to USD 49.90.
The exchange picks the single price that matches the most shares, USD 50.00, and that becomes the first traded price of the day.
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