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How can market quality be determined


The main characteristics of a market’s quality are represented by:

  • Liquidity:
    – A good quality market is a “liquid” one. Liquidity refers to the ability to quickly trade high volumes at low cost:
    quickly” refers to immediacy,
    size” to depth of the trading book, that is to say how many orders can be found in the book (number of orders)
    and “cost” to the width of the trading book that is to say how many prices can be found in the order book for a specific share.

There are other possible attributes of liquidity and the way to measure it, for example:

– The frequency with which an asset is traded  may be considered as an indicator of the liquidity of that asset

– The resiliency of a market which makes trades less liable to be made at inappropriate prices. In fact, a market is resilient if temporary price changes due to temporary order imbalances quickly attract new orders to the market that restore reasonable share values.

– Liquidity may be described as the ability to trade quickly at prices that are reasonable in light of underlying demand and supply conditions

  • Transaction costs
    – To be successful in trading, transaction costs needs to be managed carefully
  • Price sensitive information
    – Information is essential to share price formation
  • Volatility
    – Traders care about volatility because it can have a significant impact on market values:; if volatility is understood and managed, it can be a source of profits, even though it might imply potential high risks
  • Trading profits
    – Trading is a zero-sum game in which some traders gain and others lose

 


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