What Is a Dutch Auction in the Stock Market?

Dutch auctions are a method of selling shares of stock.

When a stock is first offered for sale to the public in an initial public offering, the stock is offered at a set price that is negotiated beforehand by underwriters. Dutch auction models work quite differently.

Features

In a Dutch auction model, the stock is offered at an extremely high price and then lowered until a bidder bids on it--like a normal auction in reverse. This continues until the company finds the highest price at which it can sell all the shares it wishes to offer.

Benefits

The Dutch auction method is beneficial to companies because it allows them a method of discovering a fair market price while maximizing profits. By contrast, underwritten IPOs run the risk of undervaluing the company by agreeing to sell shares to investors at a lower price than the market will bear.

History

The term "Dutch auction" dates from the 17th century, when the Dutch would conduct auctions for their tulips in this manner. More recently, Internet company Google offered its stocks in the form of a Dutch auction. The U.S. Treasury also issues its bonds using this method.

References

• Slate: What Is A Dutch Auction IPO?
• Epiq Technologies: Dutch Auction
• CNN: Google to "Dutch Auction" Its Shares