The benefits of creating a market
As I have started to reach out to customers about my company’s services, I have been asked why should the method that offers are collected be changed? Many of the sellers feel that listing a property for sale creates a market and all they need to do is host an open house and wait for the offers to roll in. This is the traditional and widely accepted method, but is this really creating a market?
I’ve worked in financial services for the last 10 years, focused mainly on trading securities and have learned a tremendous amount about how markets are structured and how to create a market for a security. A simple way to sell a security is to inform several parties that are known buyers and let them make an offer if they wish, and this is very similar to the traditional method for selling a home.
Another method is to create what is commonly referred to as “bids wanted in competition” where you tell all of the interested parties that you are selling this security, but that bids will be collected at a later time. This lets the market participants review the security and perform their due diligence. These buyers usually have very different backgrounds and some take longer than others before they are able to make an offer. By providing this lead time, everyone submits a bid at the same time and it is much easier for the seller to quickly see who has the best potential offer.
It may seem illogical in the real estate market to tell an interested buyer to hold off for several days or even a week to wait for other people to prepare their offers, but this is how a market is created and will result in seller finding the party that has the best price.
Similarities to the new NYSE auction
A recent development at the New York Stock Exchange caught my attention and has many parallels with the market structure I am encouraging sellers to use. The NYSE has stated that thousands of stocks do not trade often during the middle of the day and causes abnormal price fluctuations. Their solution is to create a midday auction to help the market trade more and at agreeable levels for the buyers and sellers. The Wall Street Journal reported “Officials aim to boost liquidity, the ability to buy and sell securities easily at a given price, by drawing trading to a single location at a given time, NYSE President Tom Farley said.” (WSJ, May 28, 2015, http://www.wsj.com/articles/nyse-looks-to-ease-late-day-pileup-1432856911).
This new midday auction will encourage more people to trade during the midday auction instead of other times throughout the day and has the same effect of grouping buyers to send in their offers at the same time. I will keep reading up on the new market structure and expect to see both buyers and sellers benefit.