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What is a modified Dutch auction?

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Investopedia describes a modified Dutch auction as a sales technique for selling stock shares where the purchase bid starts high and gradually drops until enough bids are placed to sell all of the available shares at once. Regardless of their individual bids, all bidders pay the same price, which is determined by the highest bid that guarantees the sale of all available shares.

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Investopedia explains that an underwriter serves as the auctioneer for the sales and he typically sets the initial price higher than each share's estimated market value. As an example, 100,000 shares are available and the opening bid is set at $25 a share. At $25, the auctioneer does not receive any bids. The price drops to $24, and there are several bids that add up to 50,000 shares. At $23, bids are received for all of the available shares. At $22, bidders are willing to buy 150,000 shares. The final price of the shares is then $23 since this is the highest price that ensures the sale of the entire bidding lot.

According to Investopedia, modified Dutch auctions are employed by the U.S. Treasury to sell securities. Many corporations also choose this method for initial public offerings and stock buybacks. Modified Dutch auctions are an effective method of finding the optimal sale price for a security and reflect the supply and demand of the market.

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