Matching Buyers With Sellers

“An investment in knowledge pays the best interest.”

-Benjamin Franklin

Markets are a part of our everyday lives. Whether heading to the local market to buy fruits and vegetables, the supermarket for foodstuffs, or even the gas station to fill up the tank with petrol, we encounter market-pricing every single day of the week.

Financial markets are just like these everyday markets we experience; they involve buyers and sellers, which make them “two-sided markets”. Take the local grocery market for example. Farmers come and offer their products to merchants within the market. If prices are too high, merchants may not buy their products. If prices are low, multiple merchants may bid simultaneously, driving prices higher.

Consumers are similarly sensitive to prices. If prices are too high, they may buy less of certain goods and if prices are low, they may choose to stockpile more than normal. However, this small example illustrates what makes a market: buyers and sellers coming together.

Matching Buyers and Sellers

Financial markets are simply an extension of the previous example. Replace the farmer with a seller and the consumer with a buyer and you’ve effectively created a two-sided market where both parties meet to buy and sell financial assets. At the center of the market is the market-maker, which acts as an intermediary between a buyer and seller to ensure an organized flow of orders between the two parties.

For instance, when FXTM ECN Account users open the trading platform, they will see a list of financial assets and two prices listed side-by-side, which are called the “bid” and the “ask” prices and sometimes referred to as “two-way quotes”. The bid price is the price at which the market-maker, in this case FXTM, is willing to purchase an asset from a trader who is selling. It reflects how much the market-maker is bidding, or willing to pay, to buy the asset.

The ask price is the price at which a trader can buy the asset from the market-maker. Put another way, the ask price states the price the market-maker is asking buyers to pay for an asset. The bid is the lower of the two prices and the ask is the higher of the two prices. A sample quote for an asset might look like $99.90 by $100.10, reflecting the difference between the bid and ask prices. The difference between the two prices is called the “spread”.

For market-makers like FXTM, the spread serves as compensation for the services they deliver in terms of providing continuous bids and offers for the assets listed on the trading platform. In some cases, spreads for financial assets may be fixed, and in some cases they may be variable. Very tight and narrow spreads are indicative of a popular market that has a lot of buying and selling activity. However, spreads can widen for several different reasons.

If markets are especially volatile, meaning the market is experiencing substantial directional price swings, spreads may widen. Additionally, during news announcements or economic data broadcasts, the spreads may also widen, reflecting a market-maker’s attempt to maintain an orderly market for buyers and sellers to participate in.

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How Financial Markets Support the Buy Low, Sell High Mentality

One of the important ideas behind investing, or building any market and business for that matter, is the notion of buying an asset or product at a low price, and reselling it at a higher price, therein generating a profit. Financial markets extend this concept even further, by enabling traders and investors to sell an asset at a higher price and then repurchase the asset at a lower price, thereby locking in a profit that reflects the difference in the two prices.

Two-sided markets are at the core of this activity, because they provide the pricing needed for investors to enter and exit from a trade with as little friction as possible. FXTM ECN accounts make this even simpler thanks to its no dealing desk model, making trade execution times as quick as possible without the need for requotes. This allows scalping, or the opportunity for traders to make small, quick trades designed to capture small fluctuations in prices. By engaging in this strategy repeatedly, small returns can quickly add up.

Some Thoughts On Making Markets and Spreads

Historically and in modern times, markets have been designed for one simple purpose: serving as a meeting point for buyers and sellers. Modern financial markets are no different, and the inclusion of two-sided market is alive and well thanks to the bid and ask quotes supported by market-makers on trading platforms. Though spreads may narrow or widen depending on market circumstances, the ability to quickly and effortlessly execute transactions in modern financial markets is a large part of their appeal. Buying low and selling high can be accomplished in mere seconds thanks to the rapid advance of modern technologies and the remarkable abilities of market-makers to bring buyers and sellers together simultaneously.

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