Auction Technique

Auction is the most common method to sell Government Securities. Other methods include tap sales, syndication and book building process. Presently many countries do not allow the direct participation of all investors in an auction. Instead, they are permitted to participate in the auctions through authorized intermediaries like banks and Primary Dealers (PDs). Actually, the investor base that participates in the auction process is determined by the practical situation of the process and in some cases the controlled investor base determines the evenness in the auction techniques and combinations. Discriminatory price auction is one of the options due to which the investors keep away because of the winners curse. The disadvantage is that there is a danger of irresponsible bidding and uniform collusion.

One cannot say which is better: discriminatory or uniform price auction. A combination, that is, discriminatory auction with a ceiling can be considered as important in this context, as it reduces the winners curse.

Usually the central bank does not participate in auctions, but if the situation necessitates, it has to take part in the auctions without competing with other bidders. Sometimes the central bank is involved in buying Government Securities on its own and sometimes it is compelled to do so. In countries such as Indonesia and Peru, the laws eliminate the participation of central bank in primary auctions and in countries like Malaysia, Philippines and Hungary the central banks restrict themselves from participating in the primary market.