Multiple unit auctions and short squeezes

Nyborg, K G and Strebulaev, I A (2001) Multiple unit auctions and short squeezes. Working Paper. London Business School IFA Working Paper.

Abstract

This paper contributes to the theory of multiple unit auctions by showing how a potential short squeeze in the secondary (postauction) market impacts on bidders' strategies and auction performance. 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 tobeauctioned asset between short and long bidders. Equilibrium bidding strategies depend on preauction allocations and the size of the auction. Short squeezes are more likely to happen after discriminatory auctions than after uniform auctions. Furthermore, discriminatory auctions 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 and increase with the market power of the largest long bidders. Asymptotically, as the auction size becomes arbitrarily large, the two types of auctions lead to equivalent outcomes.