Multiple Unit Auctions and Short Squeezes

44 Pages Posted: 10 Apr 2003

See all articles by Kjell G. Nyborg

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: March 2003

Abstract

This paper develops a theory of multiple unit auctions with short squeezes in the post-auction market. This is especially relevant for financial and commodity markets where players may enter the auction with established forward positions. We study how a potential short squeeze impacts on bidders' strategies and auction performance. Conversely, we also study how the design of the auction affects the incidence of short squeezes. In particular, 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, ceteris paribus. Discriminatory auctions therefore 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 the auction size, increase with the market power of the largest long bidders, and decrease with small long players' scope for free-riding on a short squeeze. Asymptotically, as the auction size becomes arbitrarily large, the two types of auctions lead to equivalent outcomes.

Keywords: Multiple Unit Auction, Uniform auction, Discriminatory Auction, Treasury Auction, Repo Auction, Short Squeeze, Market Manipulation, Market Power

JEL Classification: D44, G12, G20, D62

Suggested Citation

Nyborg, Kjell G. and Strebulaev, Ilya A., Multiple Unit Auctions and Short Squeezes (March 2003). FEEM Working Paper No. 27.2003; EFA 2002 Berlin Meetings Presented Paper; IFA Working Paper No. 328. Available at SSRN: https://ssrn.com/abstract=267198 or http://dx.doi.org/10.2139/ssrn.267198

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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