Dutch Auction

Dutch Auction

In a Dutch auction, each individual bidder will end up paying the same price as their competitor. During an initial public offering (IPO), the prospective investors will place orders for the number of shares they want and the price they are willing to pay per share. The price that the shares will be sold at or the clearing price is determined by the price at which all of the shares in the offering will be purchased. Investors who bid higher than the clearing price will receive the number of shares they ordered at the clearing price which may actually be lower than the price they were willing to pay. Investors who bid lower than the clearing price will receive no shares.

Some people believe that Dutch auctions are better than traditional auctions because the quantity of shares an investor is willing to purchase will not determine whether or not they receive those shares. It is considered more democratic since the price is the only determining factor. For example, if a larger company placed an order for two million shares at a price that fell below the clearing price they would receive zero shares. On the other hand if a small investor placed an order for only two hundred shares but they bid at or above the clearing price, they would receive those shares at the clearing price.

In a typical IPO the price of the shares rises as bidders compete for shares. By contrast, in a Dutch auction, the price of the shares is lowered until the clearing price in which all of the shares will be sold is determined. Therefore, if an investor bids one hundred dollars per share but the clearing price was determined to be seventy dollars per share, then that investor would only have to pay seventy dollars per share as opposed to the one hundred they were willing to pay.