Operational Efficiency

DEFINITION of 'Operational Efficiency'

A market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally-efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation, without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Also known as an "internally efficient market".

BREAKING DOWN 'Operational Efficiency'

Consider the hypothetical example where all brokers charged a minimum commission of $100 per trade. If you were a huge mutual fund trading 20,000 share blocks at a time, this fee may not limit your ability to be operationally efficient in your trading. But if you were a small investor looking to trade 10 or 20 shares, this fee would keep you from trading almost entirely, making the market (as you saw it) extremely inefficient.

In the case of trading costs, the advent of electronic trade and increased competition have pushed fees low enough to be fair to investors while still allowing brokers to earn a profit.

In other areas of the market, certain structural or regulatory changes can serve to make participation more operationally efficient. In 2000, the Commodity Futures Trading Commission (CFTC) passed a resolution allowing money market funds to be considered eligible margin requirements, where before only cash was eligible. This minor change reduced unnecessary costs of trading in and out of money market funds, making the futures markets much more operationally efficient.

RELATED TERMS
  1. Money Market Fund

    An investment fund that holds the objective to earn interest ...
  2. Critical Path Analysis

    A project-management technique that lays out all the activities ...
  3. Materials Requirement Planning ...

    One of the first software based integrated information systems ...
  4. Commission

    A service charge assessed by a broker or investment advisor in ...
  5. Friction Cost

    The direct and indirect costs associated with the execution of ...
  6. Commodity Futures Trading Commission ...

    An independent U.S. federal agency established by the Commodity ...
Related Articles
  1. Investing Basics

    4 Things You Didn’t Know About Southwest Airlines (LUV)

    Learn some little-known facts about Southwest Airlines' surging business.
  2. Fundamental Analysis

    The Top 3 Reasons Southwest's Stock Is a 'Buy'

    Discover the key differences between Southwest Airlines and other major U.S. airlines that have made Southwest a major business success.
  3. Investing Basics

    Will Zynga's New Strategy Win Back Mobile Gamers?

    Explore the history and current activities of the Web game developer Zynga, and learn what the company is doing to make a comeback in the market.
  4. Investing Basics

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  5. Brokers

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  6. Options & Futures

    Don't Let Brokerage Fees Undermine Your Returns

    Smart investors don't give away more money than necessary in commissions and fees. Find out how to save.
  7. Options & Futures

    How To Buy Oil Options

    Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange.
  8. Mutual Funds & ETFs

    Top 3 UBS Global Funds for Retirement Diversification in 2016

    Learn about UBS's asset management business, past mutual fund performance and the top three UBS mutual funds to consider for retirement diversification.
  9. Mutual Funds & ETFs

    Invesco’s Top Funds for Retirement

    Here's a list of Invesco investments—retirement funds—that may work for you if you have the time to let them mature over the long term.
  10. Mutual Funds & ETFs

    Top 4 Royce Funds for Retirement Diversification in 2016

    Discover four of The Royce Funds mutual funds suitable for diversifying retirement portfolios that focus on investing in small-cap companies.
RELATED FAQS
  1. What types of data are mined for business intelligence?

    Generally, businesses mine whatever data can be computerized for analysis and studied to improve operational efficiency, ... Read Full Answer >>
  2. How does zero-based budgeting help lower operating costs?

    Zero-based budgeting helps lower costs by reducing unproductive spending. Zero-based budgeting is a rigorous process that ... Read Full Answer >>
  3. What role do core competencies play in a balanced scorecard?

    To a business, a core competency is a an area of specialization that helps bring value to customers. The balanced scorecard ... Read Full Answer >>
  4. How liquid are BlackRock mutual funds? (BLK)

    BlackRock, Inc. (NYSE: BLK) mutual funds are very liquid, as are all mutual funds. An investor receives payment for a redemption ... Read Full Answer >>
  5. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  6. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center