|Bidding strategies in future auctions of EUAs|
|Friday, 16 April 2010 21:56|
The rules on the random resolution of “tied bids” and on the application of a uniform clearing price, foreseen in the Commission proposal for the Regulation on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and the Council establishing a scheme for greenhouse gas emission allowances trading within the Community (version of 6 April 2010) will for sure be of utmost attention of the future auction participants.
According to the Impact Assessment, amongst the arguments for the eventual model in that regard was the intention to facilitate access to auction for small and medium-sized enterprises (SMEs).
Uniform clearing price means that any successful bidder will pay the clearing price - as opposite to the discriminatory pricing, where winning bidders pay the price they bid.
Tied bids are, in turn, bids exactly at the clearing price which can not all be honoured due to the limited and predetermined volume available for the auction concerned.
The Article 8 paragraphs 1 – 4 of the draft of the draft of the Regulation state:
“1. The auction clearing price shall be determined upon closure of the bidding window.
2. An auction platform shall sort bids submitted to it in the order of the price bid. Where the price of several bids is the same they shall be sorted through a random selection. The auction platform concerned shall publish a description of the means used for this random selection of bids on its website.
The volumes bid shall be added up, starting with the highest bid price. The price of the bid at which the sum of the volumes bid matches or exceeds the volume of allowances auctioned shall be the auction clearing price.
3. All bids making up the sum of the volumes bid determined pursuant to paragraph 2 shall be allocated at the auction clearing price.
The thorough analysis of potential effects of these rules will of course shape the behavior of bidders in CO2 allowances primary market. Some of the predictions in that regard can be found in the very Impact Assessment (IA - the accompanying document to the draft of the Regulation).
In effect of the adoption of uniform clearing price, in the future auctions small bidders will have the possibility to bid safely at a relatively high prices without much risk of actually having to pay that price. SMEs will not need thus to guess the right bid level as would be necessary in a discriminatory-price auction. The costs of participation in the auction (amongst other things the costs of market analysis) for SMEs will be thus lower. The lower will be however also the costs of large players wishing to build a strong position that could be used for attempts to corner the market.
The Commission noted in the IA that in the uniform clearing price auction format bidders can in any event reduce the impact of the rules by placing smaller bids at slightly different prices. It seems really to be one of effective strategies.
On the other hand, however, placing of multiple bids when bidding at prices close to, but lower than the expected clearing price, involves a risk of not winning all bids.
The second important feature of the model adopted in the aforementioned draft of the Regulation, is that tied bids will be resolved by means of a random process. Justification for this solution is that it generates uncertainty for bidders that collude on the price they are bidding.
As states the recital 11 of the draft of the Regulation, there should be, however, no limit on the number of bids which a bidder may submit unless such a limit is provided for in the contract appointing the auction platform. Such a limit should be introduced only if justified “for technical reasons and their associated costs”.
But, as a result of these provisions, it would not – in most cases – be advantageous for the bidder to place in an auction one big offer instead of a multiple smaller bids with slightly differing price. The latter possibility entails in this situation a better chance of winning EUA’s in the auction. When a bidder decides on placing multiple bids at the same price, the chances may also be better – under condition, however, that uniform clearing price will be the same as the price of the said multiple bids. Multiple bids at the same price reduce in this situation the risks of the random resolution of tied bids.
A big mystery is a provision of Article 8 paragraph 6 of the Regulation according to which, “Where the auction clearing price is significantly under the price on the secondary market prevailing during and immediately before the auction, the auction shall be cancelled”.
Neither the draft of the Regulation, nor the IA explains, on what occasions auction clearing price will be regarded as “significantly under the price on the secondary market”. Detailed mechanism and criteria for that procedure weren’t so far revealed. In effect, the risk of cancellation of the auction should be always taken into account.