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This paper contributes to the theory of multiple unit auctions by showing how a potential short squeeze in the secondary (post-auction) market impacts on bidders' strategies and auction performance. This is especially relevant for financial and commodity markets, and our model delivers many empirical predictions. We model both uniform price and discriminatory price auctions in a true multiple unit setting, where bidders can submit multiple bids for multiple units. Our model is cast in what appears to be a common value framework. However, we show that the possibility of a short squeeze introduces different valuations of the to-be-auctioned asset between short and long bidders. Equilibrium bidding strategies depend on pre-auction allocations and the size of the auction. Short squeezes are more likely to happen after discriminatory auctions than after uniform auctions. Furthermore, discriminatory auctions lead to (1) more price distortion; (2) higher revenue for an auctioneer; (3) more volatility in the secondary market. This shows that a central bank or sovereign treasury, say, may face a tradeoff between revenue maximization and market distortions when choosing the design of repo or treasury auctions. The probability of a short squeeze following a discriminatory auction tends to decrease with

We study an important recent series of buyback auctions conducted by the U.S. Treasury in retiring $67.5 billion of its debt. We find that the Treasury was successful in buying back large amounts of illiquid debt while suffering only a small volatility-related market-impact cost. Although the Treasury had the option to “cherry pick ” from among the bonds offered, we find that the Treasury was actually penalized for being “spread too thin ” by including multiple bonds in a buyback auction. We find evidence that the Treasury may have attempted to minimize its interest expense rather than its buyback costs in these auctions. There is no evidence, however, that the Treasury used its “timing ” option to exploit auction participants

This paper will present and discuss one phenomenon, namely that the basic assumptions of economics – perfect markets and rational behavior – do not hold, known in literature as The Winner’s Curse.

Examination of new data of the Mexican government securities primary auctions shows, not only that there exists underpricing with respect to the secondary market in CETES of 28, 91, 182, and 365 days maturity, but also that such underpricing tends to increase over time, especially during the period of 1996-2000. This study also finds that changes to the auction format employed by the Mexican Treasury do not fully account for this pattern because in spite that since 1995 the discriminatory format is in place, some modifications have been adopted with the purpose of improving sales conditions in the primary auctions, like setting common maximum bidding limits for all participants or reopening securities issues with high observed interest rates. Usual factors assumed to affect auction prices by existing models, like competition level, bidder participation and market uncertainty seem to play a role. However, evidence is also found that some factors related to secondary market features suggested by the finance microstructure literature, like liquidity, inventory and adverse selection costs may be playing an even more important role. Overall, these findings provide confirmation of the relevance of resale markets and suggests that: 1) it may be fruitful to add some of these latter features in future theoretical models about government securities markets and 2) to improve secondary market conditions may be important to enhance efficiency in the primary market.

The Bank of Spain uses a unique auction format to sell government bonds, which can be seen as a hybrid of a uniform and a discriminatory auction. For winning bids above the average winning bid, buyers are charged the average winning bid, otherwise they pay their respective bids. We report on an experiment that compares this auction format to the discriminatory format, used in most other countries, and to the uniform format. Our design is based on a common value model with multi-unit supply and two-unit demand. The results show significantly higher revenue with the Spanish and the uniform formats than with the discriminatory one, while volatility of prices over time is significantly lower in the discriminatory format than in the Spanish and uniform cases. Actual price dispersion is significantly larger in the discriminatory than in the Spanish. Our data also exhibit the use of bid-spreading strategies in all three designs.

This paper develops a theory of multiple unit auctions where short squeezes can occur in the secondary market. Both uniform and discriminatory auctions are studied, and bidders can submit multiple bids. We show that bidders with short and long pre-auction positions have different valuations in an otherwise common value setting. Discriminatory auctions lead to more short squeezing and higher revenue than uniform auctions, ceteris paribus. Asymptotically, as the auction size approaches infinity, the two formats lead to equivalent outcomes. Shorts employ more aggressive equilibrium bidding strategies. Most longs strategically choose to be passive. Free-riding on a squeeze by small, long players has no impact on these results, but affects revenue in discriminatory auctions. 2 The problem of how to organize the sale of many identical units is often solved in practice by holding an auction where bidders can submit multiple bids for multiple units. Such auctions are important, not least because the auctioned assets often play prominent

The Bank of Spain uses a unique auction format to sell government bonds, which can be seen as a hybrid of a uniform and a discriminatory auction. For winning bids above the average winning bid, buyers are charged the average winning bid, otherwise they pay their respective bids. We report on an experiment that compares this auction format to the discriminatory format, used in most other countries, and to the uniform format. Our design is based on a common value model with multi-unit supply and two-unit demand. The results show significantly higher revenue with the Spanish and the uniform formats than with the discriminatory one, while volatility of prices over time is significantly lower in the discriminatory format than in the Spanish and uniform cases. Actual price dispersion is significantly larger in the discriminatory than in the Spanish. Our data also exhibit the use of bid-spreading strategies in all three designs.

Examination of new data of the Mexican government securities primary auctions shows, not only that there exists underpricing with respect to the secondary market in CETES, the zero coupon Treasury bonds, of 28, 91, 182, and 365 days maturity, but also that such underpricing tends to increase over time, especially during the period of 1996-2000. This study also finds that changes to the auction format employed by the Mexican Treasury do not fully account for this pattern because in spite that since 1995 the discriminatory format is in place, some modifications have been adopted with the purpose of improving sales conditions in the primary auctions, like setting common maximum bidding limits for all participants or reopening securities issues with high observed interest rates. Usual factors assumed to affect auction prices by existing models, like competition level, bidder participation and market uncertainty seem to play a role. However, evidence is also found that some factors related to secondary market features suggested by the finance microstructure literature, like liquidity, inventory and adverse selection costs may be playing an even more important role. Overall, these findings provide confirmation of the relevance of resale markets and suggests that: 1) it may be fruitful to add some of these latter features in future theoretical models about government securities markets and 2) to improve secondary market conditions may be important to enhance efficiency in the primary market.

The use of structural analysis in multi-unit auctions has been limited to very few studies in the literature. Hortaçsu (2000) is the first to build a model that is both consistent with the strategic divisible good framework and computationaly tractable. I employ Hortaçsu’s methodology to data from Brazilian treasury auctions and find that it provides limited results in auctions which bidders present bids for large shares of the amount being auctioned. I develop an alternative methodology that distinguishes between dominant and non-dominant bidders and show that it provides improved results. In order to illustrate the type of applications that such methodology can be used to, I examine the existence of heterogeneity across different categories of bidders and find evidence that suggests that private components in bidders ’ valuations may be relevant to Brazilian bidders. More specifically, Commercial banks seem to show higher elasticity of demand compared to investment banks and brokers. This result indicate that caution should be exercised Recovering the actual valuation of bidders for goods that are sold through multiple-price multiple-unit auctions has been a major challenge to the auction literature. Given that these