DEFINITION of 'Smart Market'

A type of auction in which transactions are made to and from a pool of participants rather than bilaterally between one buyer and one seller. Smart markets are designed to reduce transaction costs and the effect of externalities, and are monitored by a market manager.

BREAKING DOWN 'Smart Market'

Smart markets have been made possible by improvements to technology, as the calculations in their deployment can be complex. Participation in a smart market often requires the payment of an upfront fee as well as a per-unit bid. For example, the use of a smart market in electricity pricing has computers review the bids of power distributors to determine how much electricity to supply compared to the overall capacity of transmission lines. Calculations determine how much each power generator should generate, the transmission lines that will transfer power from the generators to the distributor and how much power each distributor will process.

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