Decision Market
What Is a Choice Market?
A decision market is a market where the bid-ask spread for a given financial instrument is zero. Otherwise called a locked market, this is a rare and typically short-lived situation.
Figuring out a Choice Market
In a decision market, a financial instrument can be bought at a similar cost as it tends to be sold. Conventionally, there is a difference between the highest price a buyer will pay for a security and the least price a seller will acknowledge.
Decision markets are rare in financial markets, as most financial instruments trade with a spread between the bid and the ask. A decision market as a rule happens when there is extreme liquidity in the markets and a limited number of intermediaries.
A decision market could happen, for example, in a over-the-counter brokered market in which one side pays brokerage just, or when NASDAQ securities trade before the open.
A market that most closely looks like a decision market is Forex, or currency trading, in which some currency pairs trade with a spread of just a small portion of a percent. For instance, the spread between the USD and EUR is typically just 1 basis point or 0.01%.
Special Considerations
The Securities and Exchange Commission (SEC) considers a decision or locked market to disregard fair and orderly market rules, which expects that buyers and sellers receive the next and best available prices while trading securities. SEC regulations require national exchanges not to display a quote that demonstrates a locked market.
The SEC passed the Regulation National Market System in 2007, which banned locked markets with an end goal to make an additional orderly and competitive means for investors to transfer risk on the secondary market.
Policy pundits contend that banning locked markets smothers innovation and the regulations don't accomplish their expected effect. The ban on locked markets makes it more troublesome and more costly for investors to buy stocks. All things considered, a securities data processor is probably going to display inaccurate bid-ask data for a given security. This can lead exchanges to decline orders since they are depending on off base pricing data.
High-frequency traders might have the option to get around locked market limitations, permitting them to exploit the lag time between the stock bid and price changes and SIP refreshes. This can permit them to trade stocks at additional advantageous prices than other investors trading similar stocks at a similar exchange simultaneously.
Numerous analysts fight that a nullification of the ban on locked markets would be pointless due to the numerous other rules and regulations currently in place. While some declare that a nullification of the ban on locked markets would wipe out many order types and make the market less complex, others contend that a cancelation of the ban would lead to additional crossed markets or markets in which bid prices are lower than asking prices.
Highlights
- In a decision market, the bid-ask spread for a security is zero, implying that a financial instrument can be bought at a similar cost it would cost to sell it.
- A decision market, likewise called a locked market, is an unusual and ordinarily short-term occurrence, as there is normally a spread between the bid price and ask.
- Regulators view a decision market as disregarding market rules that expect investors to receive the next and best available prices while trading.
- Accordingly, the Securities and Exchange Commission banned locked markets in 2007, in spite of analysis that doing so eases back innovation and makes it harder and more costly for investors to buy securities.
