Tight Market

DEFINITION of 'Tight Market'

A market with narrow bid-ask spreads. A tight market for a security or commodity is characterized by abundant liquidity and frenetic trading activity. Intense price competition on both the buyers' and sellers' sides leads to tight spreads, the hallmark of a tight market.

The term "tight market" may also refer to a physical market where supply is constrained in the face of high demand, resulting in higher prices for the product or service.

BREAKING DOWN 'Tight Market'

Most blue-chips have tight markets, since there is plenty of interest from buyers and sellers at any point in time. Occasionally, however, tight market conditions may be disrupted by a sudden change in the market environment (due to a geopolitical development, for example) or the occurrence of a stock-specific event (such as an earnings warning). When this occurs, bid-ask spreads may widen as liquidity dries up, until there is more clarity to the situation. Tight market conditions will generally return once the situation has been resolved and normalcy has been restored.

A physical tight market may occur due to a temporary imbalance of supply and demand, or a more lasting change in fundamentals. An example of the former would be the market for a hot technology product in the first few days after its launch. An example of a longer-lasting tight market would be the downtown office rental market in a major city during a prolonged economic boom.