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Why Trading is like an Auction

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Bidding on a few items on eBay over the past few days got me thinking about the auction process involved. Now I’m by no means what could be considered an eBay veteran, although I’d like to consider myself a little more savvy than many (a dangerous thing I’m sure, with parallels to the new trader!). As a buyer, I’m looking only for items that I can’t get elsewhere on the Internet or a good deal. As a seller I’ll do my homework on selling prices, item availability, concurrent auctions and when my auction is taking place and finishing. Technicalities aside, the eBay auction works in much the same way as any other auction. Prices move based on supply and demand.

The big difference between an eBay auction and say, Crude Oil Futures, is that Crude can go down in price as well as up whereas an item listing can only go one way. Right? Well no, actually. Yes, in the sense that once a price is bid, it won’t drop from there in the same auction (unless it’s a ‘Buy It Now’ listing where the seller can increase or decrease the asking price at any time before a bid has been placed). In Crude Oil Futures, the price can drop without actually trading. But on the eBay item, if there are many listings of the same item, value is found and subsequent auction finishing prices can drop where general demand is lower. So supply and demand drive price.

What got me thinking about eBay in particular were two observations. The first was watching auction listings rocket in price toward the end of some auctions. Now of course with the way in which bidding works, it can be that prices are driven up by automatic bids up to a high price (effectively a limit order) or people trying to place single bids hoping to beat other participants by stealth. In either case, people in their fear of missing out are in danger of ending up overbidding for an item. This is particularly apparent when looking at items that are available elsewhere online at competitive prices. The action of these people pushes prices to unfair levels. On eBay, the seller can get a great price. If this happens in Crude (or any other market) then traders willing to take on the risk of the market continuing to trend can secure excellent prices going against the move when this kind of ‘going off the boil’ action occurs. Equally, a trader who holds a position with the crowd must be aware that sharp moves up can lead to sharp moves down as markets rebalance and traders reassess value compared to their own inventory.

The second observation was something that happened earlier this summer. In the build-up to the London Olympics, there was a tour of the Olympic flame throughout the UK. Many people were chosen to take part, and the end of the tour they were given the replica torch that they had used in their leg of the tour. Olympic torchbearers then flocked to eBay to sell their new torches as early listings reportedly sold for upwards of $200,000! Unbelievable when you think about it. The subsequent level of supply that flooded the market had only one outcome – a dramatic drop in prices. The most recent completed listing I found, sold for a little under $4,000.

These kinds of observation in ‘everyday auctions’ should be very recognizable to every trader, but sadly they’re not. Despite the multitude of auctions around us from eBay to grocery stores and the housing market to a simple beer, traders do not always take the time to properly assess how the market tends to auction and the possible implications that follow. How a market auctions and the manner in which it does so make up a large part of the all-important context we can use to trade so much more effectively. So I would highly suggest learning auction basics, as it is essential to successful trading.

Trade well.

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