What is a Centralized Market?
How do you define it?
What are the essential elements you should know!
In this article, I will break down the meaning of Centralized Market so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain to you what centralized markets mean and why it’s important!
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Table of Contents
What is Centralized Market
A centralized market, as the name suggests, refers to a financial market that is “centralized” where buyers and sellers and buy and sell assets in one market and where all orders are routed to the same central market.
In other words, in a “centralized market”, all investors access the same financial instruments on the basis of the same price without having a competing market pricing the same asset.
A centralized market can be contrasted with a decentralized market where the same financial instrument can be traded on various markets simultaneously.
For example, the New York Stock Exchange is considered a centralized market as you can only buy and sell securities on the New York Stock Exchange by placing orders that are routed to this market (and this market alone).
On the other hand, if you are purchasing currency on a foreign exchange market, you are not dealing with a centralized market as you can purchase foreign currency from many dealers and many traders around the world.
Centralized Market Definition
How do you define centralized market?
One definition of centralized market can be formulated as follows:
A centralised market is a system of the financial market that is to have all orders directed to one central exchange with no other competitive market. Security prices available through and quoted by the exchange (or market) are the only prices available to investors who wish to purchase or sell the particular assets quoted on the exchange.
As you can see from this definition, a centralized market has the following features:
- There is one central market
- All orders are directed to one market
- There are no competing markets
- The securities are priced through the market
- Only one price is available to all investors
How Do Centralized Markets Work
Let’s see how centralized markets work so we can better understand the concept.
No Competing Markets
A centralized market is one where all orders for certain financial instruments, securities, or assets are routed to one market (or exchange) and all transactions take place through that exchange for all investors.
In other words, in a centralized market, the securities are purchased and sold in the same exchange without investors having the possibility of purchasing or selling the same securities in other competing markets.
As a result, since there is one central market, the securities are priced centrally as well.
This means that all investors will have access to the same price quote for the same securities, at the same time.
Without a competing stock exchange or market, investors are not able to buy and sell the same instrument in a different market at different rates.
This makes the pricing of the assets highly transparent to investors as everyone is given the same price quote at the same time.
To allow for a smooth and efficient operation of the system, centralized markets have a clearinghouse representing an entity acting as an intermediary between buyers and sellers.
The clearinghouse is mandated to ensure that the transactions on the market are properly carried out effectively guaranteeing that the buyers will get their purchased securities and the sellers will get the price for their securities.
With a clearinghouse sitting between buyers and sellers, the counterparty risk is reduced as buyers and sellers no longer need to be concerned with who is buying or who is selling the securities.
Centralized Market Examples
Let’s look at a few central market examples around the world to get a sense of what it means.
There are many central markets around the world where buyers and sellers engage to buy and sell various types of financial instruments, securities, commodities, or others.
Here are some examples of central markets in the world:
- New York Stock Exchange
- Toronto Stock Exchange
- Chicago Mercantile Exchange
- Tokyo Commodity Exchange
- Athens Stock Exchange
- London Stock Exchange
- Australian Securities Exchange
Decentralized Market Emergence
A “centralized” market can be contrasted with a “decentralized” market.
A decentralized market is a market model where buyers and sellers are able to exchange with one another without having to go through a “central” exchange or market.
In modern times, there are many websites that allow buyers and sellers to directly engage with one another and trade.
For example, peer-to-peer trading programs represent an example of decentralized markets where buyers and sellers deal directly with one another.
A decentralized market can have the following features:
- There are many markets available to trade the same instrument or asset
- Buyers and sellers deal directly with one another
- The same security or asset can be priced differently at the same time
- Many online commerce websites facilitate a decentralized form of trading
Centralized Market Meaning Takeaways
So there you have it folks!
What does centralized market mean?
How does it work in simple terms?
A centralized market is a financial market where buyers and sellers route all their orders through the same system to buy and sell financial instruments or securities.
The reason why it’s a central market is that there are no other competing markets allowing buyers and sellers to trade the same security.
The main characteristics of central markets are as follows:
- No other competing markets for the same instruments
- One price quote made available to all investors
- A clearinghouse guarantees the proper execution of the trades between buyers and sellers
There has been an emergence of decentralized markets in recent years, which is the opposite of centralized markets.
In a decentralized market, buyers and sellers have the ability to trade with different parties, compete for the best price, and deal directly with one another.
Now that you know what is the meaning of a centralized market, good luck with your investigation and research!
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Meaning of Centralized Market
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