What Is a Blind Bid?
The term blind bid alludes to an offer made by investors to purchase a basket of securities without knowing which securities are incorporated or their cost. Blind bids are ordinarily executed by institutional investors and portfolio managers. These types of bids are ordinarily utilized by financial experts if and when they would rather not influence the overall market price of the securities in a basket. Executing these transactions with no information on the factors included can be very risky for traders.
Figuring out Blind Bids
Bids are offers that are made by different market makers — individuals or organizations — to buy and sell various assets. This frequently applies to different investments like stocks and bonds. By and large, when an individual or institutional investor chooses to make a bid to purchase a security, they note the amount of the security they wish to purchase and the price they're willing to pay to execute the transaction. For example, a trader might put in an offer to purchase 100 shares of Company ABC at a price of $25 per share.
There are a few situations where the investor has no information on the assets on which they're bidding. These occurrences are called blind bids. A blind bid is an offer to purchase a bundle of securities where the investor has no information on the specific securities being purchased. Traders don't be guaranteed to know the names of the stocks or assets, and may not even have any information on the prices of each. They don't really have this data until the trade is executed.
As noted over, these bids are usually utilized by institutional investors and portfolio managers who make trades for various clients. They utilize these bids to abstain from affecting the overall market or causing the cost of finding and executing targeted buy and sell trades. This empowers them to trade a book of securities without knowing the number of stocks in the portfolio and their notional value. The larger the blind bid transaction, the greater the risk premium associated with the underlying securities.
Despite the fact that there may not be a direct impact on the price of the securities in question, blind bids ultimately carry increased basis risk. That is on the grounds that the investor making the bid is unaware of the structure of the investments being bid on. The risk is that investors will wind up claiming worthless securities.
Institutional investors make basket trades (orders to buy and sell securities simultaneously) to try not to change the asset allocation in their managed portfolios brought about by price developments.
Institutional investors take a gander at the purchase of securities uniquely in contrast to individual investors. Individual investors see factors like liquidity, volatility, and company news to determine a price to pay, though institutional investors make trades in the a huge number of dollars and include whole books of securities. The practice is like buying an abandoned storage unit without understanding what's inside, however having a smart thought of what's in store overall.
Different Types of Blind Bids
Notwithstanding securities trading, blind bidding happens in different parts of the financial markets.
- Real Estate Bids: Buyers can make blind bids or blind offers for properties in the real estate market. At the point when a property is listed, numerous parties can make offers to purchase simultaneously without knowing how much the other closely involved individuals will pay. There is no transparency in this cycle, which can see the sale (and ultimate winning) price shoot up as potential buyers need to think about what will put them on top.
- Auctions: Auctions are sales where buyers try to outbid each other for a decent or service. The individual with the highest bid wins. Auctions that include blind bidding conceal the value of all bids presented by expected buyers. Just like blind offers in real estate, this includes some mystery, where the bidder must choose the amount to pay to win the auction.
- Infrastructure Projects: Governments generally utilize a blind bidding process to award contracts for different ventures, for example, infrastructure improvements or data technology projects. Solicitations are shipped off independent contractors who, thusly, send in recommendations with the amount they're willing to acknowledge as payment for the job. Bids are fixed and kept secret until the due date when a champ is declared — normally the one with the lowest dollar figure. This allows all participants to partake in a fair cycle.
Illustration of a Blind Bid
A blind bid may be presented that uncovers just broad qualities of a book of securities, like its beta, volatility, and different properties without explicitly listing them. So we should assume that the portfolio has extremely low volatility and comprises of bonds.
An institutional investor might look for fixed-income investments with low volatility and run over the blind bid. Since they're just hoping to reduce risk in their portfolio, they might decide to purchase the book of securities without knowing the individual parts. The qualities of the portfolio might recommend that they comprise of exceptionally evaluated corporate bonds or potentially government securities, thus the blind bid might offer a convincing value.
The Bottom Line
A blind bid is an offer to purchase a bundle of securities without realizing the specific securities being purchased. While individual investors could never make such a deal, these transactions are commonplace among institutional investors that are more worried about the qualities of a portfolio than the individual parts.
Blind bids carry substantial basis risk, which is the risk that the investor winds up holding underlying assets that are not comparable to the investment portfolio the investor looked for exposure to initially. The potential that these instruments won't be negatively connected elevates the risk of excess gains or losses in a hedging strategy, which would ultimately increase the risk threshold past the investor's risk tolerance. Basis risk can be found in certain custom derivative contract transactions that include various currencies, volatility profiles, or betas.
- Blind bidding is likewise normally utilized in real estate, auctions, and awarding government contracts to independent contractors.
- These types of bids are regularly made by institutional investors and portfolio managers.
- Institutional investors utilize blind bids to abstain from impacting the overall market or causing the cost of finding and executing targeted buy and sell trades.
- A blind bid is an offer to buy a basket of securities without knowing the piece or cost of each.
- A blind bid is risky since investors aren't aware of the creation of the basket and may wind up possessing worthless securities.