What Is an Auction Exchange?

Stocks that are bought and sold in the financial markets must be traded on an exchange, which is a platform for different types of trading. In an auction exchange, multiple offers representing both buyers and sellers are made on behalf of an individual stock. Trading activity is often continuous throughout the course of a trading session, and the most competitive bids are the ones that prevail. The future of auction exchanges continues to evolve as electronic trading platforms are adopted by some of the oldest and most traditional trading facilities around the world.

Floor specialists and stockbrokers are needed in an auction exchange to facilitate trades on behalf of buyers and sellers. The process is competitive, especially for securities where demand is high. Offers are presented both by sellers and buyers of a stock, and it is the job of the specialist to obtain the best possible price for clients. Several different factors are in play.

A bid price, for instance, represents the price that buyers in an auction exchange are willing to pay for a particular stock. The ask price is the expectation that sellers have based on the most recent trading activity surrounding that financial security. It is the job of the market specialist to match buyers of a stock with sellers. When there are more sellers than buyers, the price of the stock is pushed downward. Greater buyer activity leads to a higher stock price.

Open outcry is a system used in trading, and it is another way to describe an auction exchange. The proliferation of electronic trading platforms and after-hours trading has threatened the viability of auction-style trading. Nevertheless, open outcry remains part of major U.S. exchanges, such as the New York Stock Exchange and the CME Group in Chicago, Illinois, where commodities are traded, even though there is also an electronic platform at both facilities. The electronic component removes the need for trading specialists to match buy and sell orders as these functions are instead accomplished quickly and efficiently with computers.

In an open outcry setting, trading specialists wear colorful jackets in order to be quickly recognized by colleagues across the trading floor. These professionals use hand signals to communicate orders and are often shouting out the details surrounding buy and sell orders that were placed. In this environment, there are many different trades being negotiated on the auction exchange at the same time.