how the u s treasury uses dutch auctions
the u s treasury uses a dutch auction to sell its securities to help finance the country s debt the u s treasury holds regular auctions to sell treasury bills t bills notes t notes and bonds t bonds collectively known as treasuries prospective investors submit bids electronically through treasurydirect or the treasury automated auction processing system taaps which accepts bids up to 30 days in advance of an auction suppose the treasury seeks to raise 9 million in two year notes with a 5 coupon let s assume the submitted bids are as follows the bids with the lowest yield will be accepted first since the issuer will prefer to pay lower yields to its bond investors in this case since the treasury is looking to raise 9 million it will accept the bids with the lowest yield up to 5 07 at this mark only 2 million of the 3 million bid will be approved all bids above the 5 07 yield will be rejected and bids below will be accepted in effect this auction is cleared at 5 07 and all successful bidders receive the 5 07 yield lowest bidding dutch auctionat a lowest bidding dutch auction prices start high and are dropped successively until a bidder accepts the going price once a bid is accepted the auction ends for example say an auctioneer starts at 2 000 for an item the bidders watch the price decline until it reaches a price that one of the bidders accepts no bidder sees the others bids until after their own bid is formulated and the winning bidder is the one with the highest bid so if there are no bidders at 2 000 the price is lowered by 100 to 1 900 and the bidding moves lower from there if no one bids at 1 900 if a bidder accepts the item of interest at say the 1 500 mark the auction ends benefits and drawbacks of dutch auctionsthe use of dutch auctions for initial public offerings offers benefits as well as drawbacks example of dutch auctionthe most prominent example of a dutch auction in recent times was google s ipo in august 2004 the company opted for this type of offering to prevent a pop in its prices on the first day of trading while the increase in share prices is a standard phenomenon in stock markets it had escalated to bubble territory for tech stocks during the internet bubble of 2000 from 1980 to 2001 the pop in first day trading was 18 8 that figure jumped to 77 in 1999 and in the first half of 2000 google s initial estimate for its offering was 25 9 million shares in the range of 108 to 135 but the company revised its expectations about a week before the actual offering after analysts questioned the reasoning behind those figures and suggested that google was overpricing its shares in the revised estimate google offered to sell 19 6 million shares to the public at a price range of 85 to 95 the response to the offering was considered a disappointment although google was considered a hot company and offering investors priced its shares at 85 the lower range of its estimates by the end of the day the shares were exchanging hands at 100 34 a pop of 17 6 during the first day of trading observers blamed the poor performance on negative press reports about the company leading up to its ipo a u s securities and exchange commission sec inquiry into its executive share allocation further dampened enthusiasm for google s offering the company was also said to be secretive about its use of raised funds making it difficult to evaluate its offering especially for small investors not aware of the emerging market for search engines and organizing information on the web 