Call auctions are special types of auctions in which both buyers and sellers have the ability to set pricing for goods and services offered. With this arrangement, a buyer can place an order to buy a particular good for a specific unit price, and receive bids from different sellers. At the same time, sellers can promote goods for sale within a call auction, effectively setting a minimum bid that must be met before the item is considered to be won. The terms that govern a call auction must be in accordance with trading regulations that apply to the jurisdiction in which the auction takes place.
In many places, a call auction serves as an alternative to the more common approach of matching orders between buyers and sellers. With a matching process, brokers will seek to bring together a seller who has an item available for a certain price with a buyer who is willing to pay that particular price. By contrast, the call auction allows buyers and sellers to both set their prices, then participate in a bidding process to determine which buyers eventually do business with which sellers.
The bidding that takes place with a call auction is usually managed by the submission of what are called limit orders. Basically, this arrangement allows a seller to limit bids on the items offered at auction to only those that are over a certain price. At the same time, the limit order submitted by a buyer may indicate the maximum amount he or she is willing to pay. The orders are accepted for a pre-determined period of time, then evaluated to determine which buyer and seller will move on to create a working contract that governs the transaction between the two parties.
The concept of the call auction is normally associated with the sale of securities, such as stocks, commodities, or even bond issues. This approach can also be used to manage the sale of other types of investments, including real estate, artwork, or jewelry. With any application, the idea is to provide a platform that has the potential to benefit both parties while also creating some degree of stability in terms of the eventual sale price for the goods under consideration.
While the exact structure of a call auction must be in compliance with applicable trade regulations, most jurisdictions do consider the submitted bids in the form of the limit orders to be binding. Failure to honor a bid can lead to serious issues, including buyers being banned from participating in future auctions. For this reason, care should taken in setting prices before making a decision to submit the limit order.