Clock Auctions with Many Products: GDT Trading Events

While the basic mechanics of GDT Trading Events can be understood using a simple, single product clock auction as in our previous article, in Trading Events run by GDT, sellers typically offer more than 100 distinct products. While this does not fundamentally alter how the auction operates, it introduces complexities that are essential for participants to understand to be able to navigate a Trading Event successfully.

Product Groups and Sellers

A typical GDT Trading Event currently involves not just one Traded Product, but more than 110, in eight Product Groups: Anhydrous Milkfat (AMF), Butter, Buttermilk Powders, Cheddar, Lactose, Mozzarella, Skimmilk Powders (SMP), and Wholemilk Powders (WMP). Within these Product Groups, each Traded Product is distinguished by the Seller offering it. This means that bidders do not bid for products without knowing who they are buying from. Instead, bidders can decide which Seller’s product to bid on. This matters not just because there may be subtle differences in the products being offered by different sellers even when they are in the same Product Group. It also matters because different sellers ship their product from different locations, which affects transport costs. Bidders may for example prefer to buy a more expensive product over a cheaper one if shipping the more expensive product incurs lower transportation costs. By clearly distinguishing products by the Seller offering them, GDT Trading Events ensure that bidders have full control over what Seller they purchase from and thereby knowing exactly what they are getting when they are winning some quantity in a Trading Event.

Product Specifications:

Within each Product Group, the Seller can be more specific about the precise Specification(s) they are offering. For example, there can be both Low Heat SMP and Medium Heat SMP being offered within the SMP Product Group by a Seller.  Alternatively, a Seller with multiple production locations might also distinguish between these when offering its products. While two Sellers may seemingly both offer the same Specification, say “Regular WMP”, the details of the specification may differ. It is thus important for the Sellers to think about and clearly describe their offered Product Specification and for bidders to be aware of this information.

Contract Periods:

Traded Products can differ by when shipment takes place. In GDT Trading Events this is called the Contract Period, which are set out in Rules C1.2 and C1.3 of the GDT Trading Event Rules. There are currently six Contract Periods being offered in GDT Trading Events, starting from shipment in the month just after the month in which the Trading Event takes place (CP1) up to six months later (CP6). Given the global nature and thus the resulting distances of the trading of dairy commodities, the most often used Contract Period on GDT is for shipment two months after the month of a Trading Event (CP2).

Not all products are offered for all Contract Periods. Each Seller decides for themselves what Contract Periods to offer, depending on their own and their customers’ requirements.

Multiple products and bidder behavior:

The presence of multiple Traded Products at the same Trading Event also means that bidding behavior may be more complex. If there is only a single Traded Product, bidders would typically be expected to reduce their demand as the announced price increases. When there are multiple Traded Products, however, bidders may respond to the price increase for one Traded Product by switching their demand to another Traded Product. For example, if the announced price for Regular WMP for CP2 increases, a bidder may reduce their demand for that Traded Product and, at the same time, increase the bid for Regular WMP for CP3 or for Regular WMP for CP2 from another seller.

Such behaviour means that even if for one Traded Product demand equals supply, price changes for other products could lead to the demand of the Traded Product to increase above supply again, potentially necessitating further price increases to ensure that there is no excess demand. Because of the possibility of demand interdependence, where price changes for one product lead to changes in the demand for another product, a GDT Trading Event currently allows bidding for all Traded Products until the demand for all Traded Products is equal to or below their respective maximum supply.

- Written by GDT Chief Economist Philipp Heller