Dutch Auction - Public Offerings

Public Offerings

The United States Department of the Treasury, through the Federal Reserve Bank of New York (FRBNY), raises funds for the U.S. Government using a Dutch auction. The FRBNY interacts with primary dealers, including large banks and broker-dealers who submit bids on behalf of themselves and their clients using the Trading Room Automated Processing System (TRAPS), and are generally told of winning bids within fifteen minutes.

For example, suppose the sponsor of the issuance is seeking to raise $10 billion in ten-year notes with a 5.125% coupon and in aggregate the bids are as follows:

• $1.00 billion at 5.115% (highest bid)
• $2.50 billion at 5.120%
• $3.50 billion at 5.125%
• $4.50 billion at 5.130%
• $3.75 billion at 5.135%
• $2.75 billion at 5.140%
• $1.50 billion at 5.145% (lowest bid)

In this example the % at high is 66.66%, meaning only $3 billion of the $4.5 billion at 5.130% will get bonds. Bids will be filled from the lowest yield (highest price) until the entire $10 billion has been raised. This auction will clear at a yield of 5.130%, and all bidders will pay the same amount. In theory, this feature of the Dutch auction format leads to more aggressive bidding as those who in this case bid 5.115% will receive the bonds at the higher yield (lower price) of 5.130%.

A variation on the Dutch auction, OpenIPO, was developed by WR Hambrecht and has been used for 19 IPOs in the US, while three other companies, including Google, used auctions for their IPOs but did not do an OpenIPO. Auctions have been used for hundreds of IPOs in more than two dozen countries, but have not been popular with issuers and thus were replaced by other methods. One of the largest uniform price or "Dutch" auction IPOs was for Singapore Telecom in 1994. The 1994 auction IPO of Japan Tobacco was substantially larger (with proceeds more than double those of Singapore Telecom and triple those of Google), but this auction was discriminatory or pay-what-you-bid, not uniform price or "Dutch". SRECTrade.com uses a two-sided Dutch auction to trade Solar Renewable Energy Credits (SRECs).