How Auction Markets Work for Private Companies and Funds

For private companies that want genuine price and volume discovery in a secondary transaction, an auction market can be a powerful tool. Here is what it is, how it works, and when it might be the right structure for your company.

When a private company decides to offer liquidity to its shareholders, one of the most important decisions it will make is how to structure the transaction. Should it set a fixed price? Should it run a tender with multiple prices? Or should it let the market speak for itself through an auction?

Auction markets are a well-established mechanism in public markets. But increasingly, they are being applied to private company secondary transactions, giving issuers and participants a structured, transparent, and regulated way to discover the true price and volume of demand for a company’s shares.

This article explains how auction markets work in a private company context, how they differ from other transaction structures, and what companies and investors should consider when evaluating whether an auction is the right approach.

What is an Auction Market?

An auction market is a transaction mechanism where buyers and sellers submit orders, and an algorithm determines the price and volume at which trades are executed. Unlike a fixed-price transaction, the price in an auction market is not set in advance by the issuer. Instead, it is discovered through the collective activity of participants placing bids and offers (or buys and sells) within a defined price range.

In public markets, you will recognise this as the opening or closing match on the ASX, where buy and sell orders accumulate and a matching algorithm solves for the price that maximises the volume of executable trades.

In the private company context, the same principle applies. An issuer establishes parameters, including a price range and transaction window length. Throughout the transaction window, the orderbook is made visible to all participants and people submit their orders. The auction algorithm then solves for the maximum executable volume.

How an Auction Market Works: Step by Step

While the mechanics may vary slightly by platform and structure, the following steps represent how an auction market typically operates for a private company secondary transaction on a regulated platform such as FCX.

1. The issuer sets the parameters

The company or fund (Issuer) defines, the price range within which orders can be placed, and the timing of the Trading Window.

2. Participants submit orders

Eligible buyers and sellers log into the platform and submit binding orders. Buyers indicate how many shares they wish to acquire and at what price(s). Sellers indicate how many shares they wish to sell and at what price(s). The live orderbook is visible to all participants, providing full transparency of market depth and price levels.

3. The algorithm solves for maximum executable volume

When the Trading Window closes, the FCX matching algorithm calculates the single clearing price at which the greatest volume of buy and sell orders can be matched. This is the Trade Price, and it reflects the intersection of supply and demand across all participants.

4. Trades are executed and settled

Matched orders are executed at the Trade Price. On a regulated platform like FCX, settlement is handled atomically using distributed ledger technology (DLT), ensuring that the transfer of shares and funds occurs simultaneously, reducing counterparty and settlement risk.

5. An immutable record is created

Every step of the transaction is time-stamped and recorded, creating a full audit trail. This supports the company’s cap table management and provides a defensible record for compliance purposes.

Auction Market vs Tender Market: What is the Difference?

Private companies considering a secondary transaction on FCX will typically have three structural options available to them: a fixed-price Tender Market, a multi-price Tender Market, or an Auction Market. Understanding the difference is important for matching the right structure to the company’s objectives.

Feature

Fixed Price Tender

Multi-Price Tender

Auction Market

Price setting

Set by the Issuer in advance

Set across multiple tranches by the Issuer

Discovered through order flow within a range defined by the Issuer

Orderbook visibility

Issuer only

Issuer only

Visible to all participants

Price discovery

None

Partial

Full, within a range

Allocation control

Issuer retains full control

Issuer retains full control

Determined by the algorithm

Best suited for

Issuers with a clear view on valuation who want maximum control

Issuers wanting flexibility across price points to test price discovery

Issuers seeking market-validated price and volume discovery

The auction market is particularly well suited for companies that want the market, to determine the clearing price. This can be valuable when there is genuine uncertainty about where demand sits, or when the company wants to demonstrate to future investors that its valuation has been validated through an arm’s-length, competitive process.

Why Price Discovery Matters for Private Companies

In public markets, price discovery happens continuously and automatically. Shares can trade thousands of times a day, and the price at any given moment reflects the aggregate view of buyers and sellers in the market. Private companies do not have this luxury. Without a formal transaction mechanism, the price of a private company’s shares is often based on the most recent funding round or an estimate agreed between parties in secondary deal.

This creates several risks. Pricing that is not market-tested can be challenged by regulators, auditors, or future investors. Informal, bilateral deals are often opaque and inequitable, with some shareholders accessing liquidity at different terms to others. And companies that facilitate buyers and sellers to negotiate directly, without a licence, may be inadvertently operating an unlicensed market breaching the Corporations Act.

An auction market, run through a regulated venue, addresses these risks directly. The price is not an opinion. It is the outcome of a competitive, transparent process, validated by the actual orders placed by real buyers and sellers. That is a fundamentally different, and far more defensible, foundation for a company’s valuation going forward.

Which Companies are Best Suited to an Auction Market?

Not every private company secondary transaction calls for an auction structure. The right structure depends on the company’s objectives, its shareholder base, and its view on valuation. With that said, auction markets tend to be well suited to the following situations.

Valuation validation: Companies preparing for a future capital raise or IPO who want a market-tested price to anchor their valuation story.

High demand environments: Companies with a broad, engaged shareholder base where genuine competitive interest from buyers is expected to support a strong price.

Broad ESOP liquidity events: Companies managing liquidity events for a large number of employees, where the transparency of an auction helps ensure fairness and equal access for all participants.

Companies that have a recent valuation or want to retain tight control over the final clearing price may prefer a tender structure, which allows the board to set pricing directly. FCX offers both structures, and the decision is made collaboratively with each issuer based on their specific transaction objectives.

The Importance of Running an Auction Through a Licensed Venue

This point deserves to be stated clearly. If a private company facilitates buyers and sellers to interact and negotiate a price for its shares, it can be deemed to be operating a market. Under Australian law, operating a financial market without a licence is a serious regulatory breach. The Australian Securities and Investments Commission (ASIC) can provide a Low-Volume Exemption allowing companies to transact without a licence up to a cap of $1.5 million. Beyond that threshold, a market licence is required.

FCX is the only platform in Australia that holds both an Australian Market Licence and a Clearing and Settlement Facility Licence for private market transactions, granted unconditionally by ASIC and the Reserve Bank of Australia (RBA). This means that when a private company or fund that runs an auction market through FCX, the transaction occurs within a fully regulated framework, providing legal protection for the Issuer, its directors, and its shareholders.

Secondary transactions operating outside of a regulatory framework, while common in the private market ecosystem, carry meaningful risk: regulatory exposure for the Issuer, inconsistent outcomes for shareholders, and reputational risk that can affect future capital raising. A regulated auction market eliminates these risks while delivering a better outcome for all parties.

Settlement: How Technology Makes It Secure

Settlement risk is one of the most underappreciated aspects of private market transactions. In a bilateral deal, the transfer of shares and funds can take days or weeks, with significant risk that one side of the transaction fails to perform. This creates uncertainty for sellers waiting to receive their proceeds, and for buyers waiting to receive their shares.

FCX uses distributed ledger technology to settle transactions atomically, meaning the transfer of shares and funds happens simultaneously and instantly. There is no lag between the two legs of the transaction, and no window in which settlement risk can materialise. Every transaction is fully traceable and time-stamped, creating a permanent, immutable record that supports cap table accuracy and compliance reporting.

The Bottom Line

Auction markets bring the rigour of public market price discovery to private company transactions. For companies looking to offer liquidity in a way that is transparent, competitive, and market-validated, they represent a compelling alternative to fixed-price structures. And when run through a regulated, licensed venue, they provide the governance and compliance framework that companies and their boards need.

Private markets in Australia are growing faster than public markets. Secondary market volumes are at record highs globally. The question for high-growth private companies is no longer whether to offer liquidity, but how to do it properly.

FCX offers liquidity in an illiquid market, with the regulatory infrastructure to do it right.