I don't get what's going on in the auctions. From what I can tell, bids are set too high and offers too low. Some stocks seem to have these mad jumps which recover in the morning. Anyone care to give me an idea of auction strategies? Do people lose money on them, or is it some terribly sophisticated thing that's going on?
Yonatan once told us it's only the market makers which participate. I think it's half a dozen or so instutions - Std, ABSA etc. etc. They apparently do it by phone and it goes something along the lines of we need 100 million of xyz... who's selling? We have xxx of xyz, who's buying? And they settle on the price. I suppose it depends how desperately they need to dump/buy their excess stock (pun?) which contributes to those gaps. I suppose a generous quantity discount can also be negotiated on a million or so Standard Banks, like the other day :-)
not correct .. anybody can partake in the auction (closing, opening, intra-day) .. bids and offers are entered into the market - but not matched until the auction ends - open (9am) or close (5pm) .. then at the close/open the system matches the single trade at price at which the most volume trades .. that trade could include many people on either side, not a single on eitgher side ..
The system will pick a price p such there is an equal volume of bids above or equal to p, as the volume of offers below or equal to p. Then all of those trades will go through at a price of p. Therefore, in the auction, your trade could go through at a better price than your bid / offer, but never at a worse price. After the auction, all of the bids that remain are at a lower price than the remaining offers.
Okay. I'm still wrestling with that maths, but the last part is very intersting (useful) ie that it's basically like an auction with reserve - you can do better, but not worse than your price. I suppose that holds for buyers and sellers, right?