Mar 21, 2024 Value Broking 6 Mins 1.7K

One-sided marketplaces may be unstable and upsetting for market participants. Market participants feel compelled to facilitate trading in specific stocks, even if it is inappropriate or less financially beneficial. In this example, it may also be constructive for market makers. If everyone wants to buy the stock and the market participant is the only one selling, the trader can likely sell the shares at a very high price in this one-sided market. It, in turn, indicates that investors will most likely pay a hefty cost. A one-sided market is also known as a one-way market. 

One-sided market meaning: Suppose Corporation XYZ is a healthcare company exploring cancer therapies. After 30 years of research, it makes a critical breakthrough that allows it to develop and patent a cancer vaccine that is 90% effective. It is a remarkable discovery that will instantly save millions of lives. In addition, because the technology is patented, Company XYZ will be the exclusive provider of the vaccine, putting it in a highly profitable position.

As a result, after the word spread, almost every investor wants to acquire shares in Company XYZ, and no one wants to sell. As a result, the market becomes one-sided. Financial institutions acting as market participants for Company XYZ are required to assist in trading and serve as sellers. As a result, they simply provide an offer price for the stocks in their inventory.

A one-way market, sometimes known as a one-way market, is a market in which market makers only display a bid or offer price instead of both. In a larger sense, the idea refers to instances in which the overall market is strongly leaning in one direction.

Understanding One-way Markets

Market makers must uphold a two-sided market where investors may see both a bid and an ask price. It is referred to as a bid-ask spread. However, if there is a lot of demand for a particular stock and the trader is the only one selling, the trader may be able to sell the stocks for a very high cost and therefore only show one offer. As a result, the market becomes one-sided.

When only prospective buyers or sellers are involved in a given security, but not both, the market is said to be one-sided. Although these scenarios are relatively rare, they arise periodically with widely anticipated firms’ initial public offerings (IPOs).

One-way marketplaces may also refer to instances when the entire market is significantly trending in one way. Almost every investor wants to acquire this company’s stock, and no one wants to sell. Individuals or brokerage firms acting as market makers for a pharmaceutical business are required to assist trades and function as sellers. As a result, they display a bid price for the stocks in their possession. 

Implications of One-way Market

One-way markets can be volatile and stressful for financial institutions functioning as market makers, who are required to enable trade in specific equities even if it is less expensive or more difficult to do so.

Market makers assume significant levels of risk due to the vast number of units in their inventory and get rewarded for that risk of keeping assets. As a result, they will become exposed to a probable drop in the commodity or asset value. It will happen after it gets acquired from a seller and delivered to a buyer. These brokerage firms “create a market” by purchasing and selling securities of a particular group of corporations to broker-dealer companies that are members of that market.

While one-way markets might be unpredictable and unstable, the pharmaceutical industry example shows how they can also be highly profitable for market participants. It impacts investors because investors are likely to pay very high prices when a trader can sell shares at extremely high prices.

How does the One-sided market work?

In a one-sided market, the market trend is predominantly in a single direction, either upward or downward. Several factors can influence and drive the market in this manner:

The Economy: When the overall economy is experiencing growth and individuals have disposable income to invest, there is an increase in stock demand. This surge in demand leads to more buying activity, pushing the market in a specific direction.

Monopoly Seller: In certain situations, when a dominant seller or company has a unique product or service, investors may be inclined to buy shares without considering selling them. This creates a one-sided market as the demand for the company’s shares remains consistently high.

Sentiments: Investor sentiment plays a significant role in shaping market trends. For instance, during the onset of the COVID-19 pandemic in early 2020, widespread panic led to a sharp decline in the market as people sold off their shares. As things stabilized and returned to normalcy, positive sentiment gradually returned, driving the market upward as investors began buying shares again.

New Issues: Introducing a new issue, such as an initial public offering (IPO) or the issuance of bonds, can generate high investor demand. This heightened demand can cause the market to move in a single direction as buyers aim to capitalize on potential profits from the new issue.

It’s important to note that while a one-sided market may appear to offer significant opportunities, it is still subject to risks and should be approached with caution.

Conclusion

A market in which only potential buyers or sellers exist, but not both. On the other hand, quotes for a one-way market only feature a bid or an asking price. By definition, one-way markets are unstable, and dealers and market creators exist to prevent them from developing on most exchanges. However, restrictions may demand the formation of a one-way market, at least briefly. Some nations, for example, prohibit the selling of an IPO for a set length of time.

A one-sided, or one-way, market is when market makers only offer one of the bids or ask prices. When the market is going aggressively in one direction, a one-way market develops. A typical example of a one-way market is when market participants issue shares in an IPO with high investor demand. One-way markets can also occur when panic has overtaken the market, such as when an investment bubble bursts. Market makers reduce the likelihood of one-way markets by demanding a more significant difference between the bid and ask prices.

Frequently Asked Questions (FAQs)

Market makers reduce the likelihood of one-way markets by demanding a more significant difference between the bid and ask prices.

A one-way market is also known as a one-way market.