Sunday, August 26, 2007
Making A Market (Part I): Elements of an Effective Market

It seems to me that, in order for markets to work effectively for everyone, certain elements must exist:

Accessibility and Universal Opportunity for Participation – An effective market must be accessible - and equally accessible for everyone. Also, anyone on the planet can participate fully.

Transparency and Reporting – All market transactions must be public information and information about sales must be published as soon as practicable.

Liquidity – Do you know someone who, when in restaurant, prefers to be seated facing where they can see the door? Investors are like that. They invested in certain markets with the desire to preserve and increase financial assets. Their continued participation in the market depends on knowing they can convert back to cash when they want to.

Listing Standards – Minimum standards are agreed upon for being listed in the market. Meeting these listing standards is not intended to imply superior investment potential but rather that the asset listed is "for real", is not being dumped in an attempt to avoid legal issues (for example) and has allowed itself to be inspected by the market’s representatives.

Stability – Under typical conditions there should be a reasonable expectation to be able to sell your assets within a few +/- percentage points of the last reported sale for that asset.

These are the elements I can think of without looking up the subject in Wikipedia.com and they are sufficient to draw some basic conclusions.

Common Stocks

The American stock markets, such as NYSE and NASDAQ, as well as many other stock markets worldwide meet or exceed all of the above “elements”. For example, I can find out about “trades” of a particular stock, which sets the latest valuation, with a 15 minute delay at no cost to me. I further have a reasonable expectation of selling my stock in the same company for about the same price. Finding out exactly who bought or sold is beyond my capabilities but the market knows.. --Bob Ducker

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