The Morgan Stanley Art Resources Team Explains the Quirks of Art Auction Results

While the digitization of catalogs has streamlined auctions, the digitization of results data has led to some confusion.

People speak to bidders on the phone, standing in front of an Andy Warhol print
Bidding at a Sotheby’s auction. (Photo by YUKI IWAMURA/AFP via Getty Images)

While there are more longstanding art market data providers available to followers of the market, ironically, in our view, the digitization of auction information and the financialization of the most expensive works of art (trophy lots) may be making understanding the art market more complex over time.  Understanding and quantifying demand for individual artworks, artists, genres and in the overall market seems to be increasingly challenging.

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We have found that auction houses (and other select parties) are contributing to this complexity but also uniquely capable of navigating it.  As a result, it can be hard to keep up for those seeking even a simple understanding of the art market, let alone those looking to quantify the intangibles that affect it.  The following intends to demystify some of the quirks and anomalies of fine art auction results for more would-be participants.

Digitization of auction information

The dominance of online digital catalogs in lieu of now scarce physical catalogs enables auction houses to update the artworks on offer up to the moment the sale begins. Similarly, the digital online sales results may also be updated after the sale as more transaction information is available.

Withdrawals and Bought-Ins: In the weeks and days leading up to an auction, specialists market the works to potential buyers.  Through their conversations, the specialists usually come to understand whether or not there is interest in a piece and, if so, at what price level.  If there is little or no interest, the specialist may consult with the consigner to evaluate whether or not a public sale is prudent.  While there is a chance that an unknown bidder may appear, there is also the chance that the work might not sell or be bought-in, which might taint the piece in the near term as it would have been “burnt.”  Online catalogs may facilitate a more inconspicuous withdrawal of a lot as there is no fixed record as in a physical catalog.

Estimates, Hammers and Premiums: Auction estimates are a suggested range within which a work of art might sell.  A hammer price is the price at which the work is sold as the auctioneer knocks down the gavel.  The premium is the additional cost the auction house charges the purchaser as consideration for holding the auction to match the seller with a buyer.  The estimates’ accuracy or the specialist’s knowledge might be evaluated by how often the price falls within the estimate range.  However, which price should be considered?  The hammer is the price decided in the room between seller and buyer, and the auction house determines the premium independently of market participants.  Another consideration is that premiums charged by the auction houses are not the same, so there is the potential for works of art with the same hammer price to result in different costs to purchasers.

Survivorship Bias: How does one determine whether an auction is successful?  Many results are available online (and may reflect post-auction sales) and some additional information may be available on request.  If possible, it is helpful to have both hammer and premium price results so you can decipher and interpret as you prefer—all the while knowing withdrawals generally make sell-through rates look better and realized prices make sales totals seem higher.

Financialization of trophy lots

Trophy lots are works of art that sell for above $10 million and are offered in specially featured evening auctions whose results generally dominate headlines in the respective auction sales seasons.  Because of the amount of money involved as well as the dealmaking savvy of most entrants into the art market from finance, real estate and other industries, traditional terms of sale are usually insufficient at the high end of the art market.

Floors, Guarantees and Third Parties: To compete to sell the most coveted works of art, auction houses negotiate special terms that secure minimum “floor” prices for consignors.  The auction houses may finance these guarantees or they may offset the exposure with third parties who provide financing—usually in exchange for participation in prices above the floor.

Private Sales Executed in Public Market: One might consider these agreements as privately negotiated sales executed in the public market to capture any additional potential upside.  Because the terms are private, only the participants know how much of the price goes to the seller, auction house and third party.  In consideration of comparative sales results, a discerning market participant might wonder if the price is what the seller receives (which is not public) or is it what is hammered in the room or even the realized premium price.  Should the final price be the total money paid for the work or should any upside the consigner does not receive be considered an additional cost for the transaction?

“Trust but verify” not “Lies, damn lies and statistics”

While achieving high sales totals, we have found that the fine art auction market has become increasingly opaque to most observers due to unclear reporting practices and growing financialization.  Though with increased awareness and knowledge individually or with assistance, participation in this high-demand market may be gratifying.

The financial intricacies of minimum price guarantees can be complex. However, these complexities are essential to understand because their impact on the high-end art auction market is significant. The competition for auction houses to acquire the most sought-after works has seemingly intensified, arguably leading to higher prices. Trophy lots are now widely considered crucial indicators of emerging trends and market stability.  We believe that participation in this high-demand market requires careful financial planning from buyers, sellers and brokers.

Disclosures: This material is not investment advice, nor does it constitute a recommendation, offer or advice regarding the purchase and/or sale of any artwork. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. It is not a recommendation to purchase or sell artwork nor is it to be used to value any artwork. Investors must independently evaluate particular artwork, artwork investments and strategies, and should seek the advice of an appropriate third-party advisor for assistance in that regard as Morgan Stanley Smith Barney LLC, its affiliates, employees and Morgan Stanley Financial Advisors and Private Wealth Advisors (“Morgan Stanley”) do not provide advice on artwork nor provide tax or legal advice. Tax laws are complex and subject to change. Investors should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trusts and estate planning, charitable giving, philanthropic planning and other legal matters. Morgan Stanley does not assist with buying or selling art in any way and merely provides information to investors interested in learning more about the different types of art markets at a high level. Any investor interested in buying or selling art should consult with their own independent art advisor. Past performance is not a guarantee or indicative of future results. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Diversification does not guarantee a profit or protect against loss in a declining financial market. © 2023 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 6138742 12/2023

The Morgan Stanley Art Resources Team Explains the Quirks of Art Auction Results