6.11.2005

Q&A: List 3 characteristics of a well-functioning market.

A
  • Availability of Information (ie. on the price and volume of past transactions and the prevailing bid and ask prices.
  • Low transaction cost (% of the value of the trade, including the cost of reaching the market, the actual brokerage costs, and the cost of transferring the asset)
  • Informational efficiency: prices rapidly adjust to new information (to keep the prevailing price fail)
  • Liquidity: marketability (can be bought and sold quickly), price continuity (at a price close to the prices for previous transactions, assuming no new information has been received), and depth (ie. potential buyers and sellers willing to trade at prices above and below the current market price.)

Bonus Points

  • Violations of any of these characteristics will lead to higher costs and a lesser ability of investors to make quick, intelligent decisions.
  • Price continuity: quoting security prices in decimals created smaller bid and asked spreads, allowing more granular price differentiation between competing intermediaries.

Category: C++ Quant > Financial Markets

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