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".

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Federal Reserve Note

    The most accurate term used to describe the paper currency (dollar bills) circulated in the United States. These Federal Reserve Notes are printed by the U.S. Treasury at the instruction of the Federal Reserve member banks, who also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand.
  2. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  4. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  5. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  6. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
Trading Center