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How can market quality be determined


The main characteristics of markets quality are represented by:

  • Liquidity:

    – A good quality market is a “liquid” one.  Liquidity refers to the ability to quickly trade high volume at low cost: “quickly” refers to immediacy, “size” to depth of the trading book, and “cost” to the width of the trading book. There are other possible attributes of liquidity and way to measure it, for example:

    – the frequency with which an asset trade may be a proxy 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 maybe 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

  • Informative prices
    – Information is essential to price formation

  • Volatility
    – Traders care about volatility because it can have a significant impact on their wealth; if volatility is understood and managed, it can be a source of profits, even though it might imply potential high risks


 

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