How do auction markets function?

Auction markets primarily operate as order-driven markets, where buyers and sellers submit their orders, and these orders are matched based on various factors such as price and time. In this structure, the market facilitates participants coming together to negotiate and execute trades based on their bids and offers, which helps to reflect the supply and demand dynamics in real-time.

In an auction market setting, the price discovery process plays a crucial role. While it is true that price discovery mechanisms are essential to the functioning of these markets, the defining characteristic is the order-driven nature, where the matching of buy and sell orders takes precedence. This operating framework is crucial in helping ensure that the prices set in the market accurately reflect participants' willingness to trade.

The other options do not accurately depict the core role of auction markets. For instance, while dealer quotes might be involved in different types of markets, they are not the primary mechanism in auction markets, where deals occur based on direct order matching rather than pre-established dealer quotes. Moreover, the notion of trades being executed offline is misleading, as auction markets are typically characterized by their transparency and electronic execution which occurs on-screen rather than in a traditional offline environment.