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The auction you mentioned would not be a good one. If bidders don't know that they will be protected by a single clearing price, they will drastically reduce th
by kolbe 9y ago
The auction you mentioned would not be a good one. If bidders don't know that they will be protected by a single clearing price, they will drastically reduce their bids. It would basically guarantee that everyone who won the auction would be immediately under water. This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good.
Generally speaking, the highest single price that clears the entire demand is best, and would result in bidders submitting their most honest and aggressive bids.
The problem with IPO "auctions" is not that they're at one price, but that they aren't really auctions at all. It's just a private negotiation wrought with many conflicts of interest. Dropbox, for example, had 25x more demand to pay $21 a share than actually traded. And instead of raising the price further to clear the market at a fair valuation, banks instead used this archaic matching system to give shares at below-market valuation to themselves and their friends in hedge funds.
- charleslmunger 9y ago> It would basically guarantee that everyone who won the auction would be immediately under water. That's why you'd use a second price auction, or similar structure - accept a list of buy offers (price + quantity of shares), sort by price, and then choose bids in order until you've raised all the money you want to. Charge all bidders the price of the lowest offer that you satisfied. I don't think there would be a 40% pop if they'd sold shares initially like that. The reason people use this system is that it enriches the banks that recommend which system to use.
- derefr 9y ago> This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good. In other words, guessing—before a stock even IPOs—the equilibrium point said stock will arrive at once it does enter the market, is a https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest.