AUCTIONS EXPLAINED>>>> . Europe- Although the European market differs from country to country, we will concentrate on the major issuers Germany, France and Italy. An important consideration in Europe is the league tables, whereby a bank's ability to participate as a lead manager for a variety of specialized issues (ex USD denominated issue or a Government inflation bond) depends on the amount a particular bank has participated in the normal auction process. This leads banks to aggressively bid in the auction process. A typical bond being issued, a few ticks or even 10 ticks, above the secondary market level without affecting the secondary market. To encourage this behaviour some treasury departments like France and Spain give what is called a greenshoe option whereby banks are allowed to buy 10% of the amount they originally bought at a future date for the same price. This 'free option' which usually is a few days long, makes market makers even more aggressive in the auction process. The overbidding comes as a loss leader for Government desks and is usually subsidised by the Syndicate desk sometimes in the region of 5mln per year. Auctions are therefore taken completely by banks and very little participation by real money accounts. To reduce the cost of overbidding and pre-hedging (going short into the auction process), banks now attempt to tempt real money accounts into participating in the auction process by giving them this greenshoe option. . US- 22 primary dealers in US Treasuries who have to participate during the auction process. Although they don't need to bid at each individual auctions (potentially skipping some), they need to underwrite the auctions if no one else bids. This normally prevents auctions from not being covered. If bid to cover is in the low 1 to 1.5, easy to assume they probably own most of the paper and a back up in yield is likely. Also allowed to bid directly within the auction process are 'indirect bids'. Although these used to be only large real money players like Central Banks and Pension Funds, this is now open to even hedge funds. The significance of Indirect bids has therefore been reduced. Since the 22 primary dealers are expected to participate and support the auction process, they usually attempt to create a short positions in the 'when issued' security in advance. To make this process smoother, the treasury department announces a week in advance the maturity date and the amount to be issued for each security. Primary dealers can therefore start selling these securities to investors before they are issued. This is one of the reasons the market tends to be a bit weaker a few days before the auction as banks start positioning themselves before the actual auction. This prepositioning can also be dangerous as an unexpected event that starts the market to rally can also lead to a quick and painful short squeeze by the primary dealers just before the auction as shorts are squeezed out. An unexpected large demand by indirect bidders can also lead to a quick short squeeze as dealers end up unable to cover their positions in the auction process. sales@brokertalk.co.uk for free trial or seminars....