Should dealers get more skin in the game by pre-selling auction lots, rather than taking a quick, ri

Longacre

I think it goes without saying that dealers know the markets better than anyone else. They have incredible insight into the coins themselves, the prices, and also market trends. Generally they can see trends well in advance of the collecting masses.

Given the incredible knowledge that dealers have, sometimes I think that knowledge is a double-edged sword. In a way, dealers do not get paid enough for all of the knowledge that they possess. In another way, I feel as though a dealer taking a quick 10% commission (risk free) is to the detriment to the collector-client.

In order to remedy this situation, and to get dealers to put a little more skin in the auction game, should the dealers start pre-selling auction lots? Here is how it will work. A dealer views Lot #123 that is coming up for auction. He likes the coin and calls Client A, and Client A agrees that he wants to buy the coin. However, Client A (who is not an expert like the coin dealer) does not set a price. Client A tells the dealer, “you know the markets better than I do. I want the coin. Quote me an “all-in” price that I need to pay, and come hell or high water, you will deliver me that coin at our agreed upon price.”

This creates a little bit of risk for both sides. If the dealer quotes too low a price (i.e., the coin sells for more at the auction), then the dealer will lose money when he has to deliver the coin to Client A at the agreed upon price. If the dealer quotes too high a price, then there is upside to the dealer because he will make a greater profit on the coin (and not a measly risk-free 10% commission for representing the buyer at the auction). To keep the dealer honest, Client A can easily find out the selling price of the coin at auction, and if the dealer consistently overshoots the fair market values, then maybe it is time to find a dealer who is more attuned to the markets. Ultimately the pricing will stabilize within a certain band of prices (aren’t dealers market-makers anyway?).

Do you think this method will create a little bit more stability in the auction prices, and maybe help with the “value compression” issue that Doug Winter spoke about in a recent blog? The markets might become more compressed, but they might give a better reflection of a true value for particular coins, especially based on what a reasonable collector is willing to pay. Do you see any problems with this approach (I can think of some, but I want to hear other’s comments first).

RYK

My concern is that in this scenario, the dealer is essentially shorting the coin. From my limited expereince in short-selling, I know that your upside is capped and your downside is unlimited, which is not a great position to be in when someone else's dealer has also been instructed to "buy the coin".

RBinTex

Good idea in theory as far as opening up the potential for more transactions but IMHO the intrinsic dangers of non-performance (coupled with the absence of any kind of imposed "daily mark to market" oversight - so to speak) FAR outweighs the potential benefits to the buyer.

Some dealers "pre-sell" their OWN coins that are in one TPG's holder (e.g. ANACS) with the intent of delivering it to the buyer in another (TPG) holder (e.g. PCGS). FAR less risk in THAT scenario

mozin

I don't think this would work. One transaction, where the auction lot went for WAY too much money, might put the dealer out of business. Auction lots often go for multiples of projected values. A side concern, is the collector might feel used paying the $1000 agreed upon price, if the dealer later won it at auction for only $500.