What Is a Centralized Market?

A centralized market is a financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.

Key Takeaways

  • A centralized market is a financial market structure that consists of having all orders routed to one central exchange with no other competing market.
  • A centralized market functions to keep trades fair, do more business, and speed up the buying/selling process.
  • Centralized markets are good for stockholders as the lack of a competing price model for an individual stock ensures that price movements become somewhat more predictable.
  • Decentralized markets have become more popular since the advent of blockchain technology, but there is less regulation and no government oversight.

Understanding Centralized Market

The New York Stock Exchange is considered a centralized market because orders are routed to the exchange and are then matched with an offsetting order. On the other hand, the foreign exchange market is not deemed to be centralized because there is no one location where currencies are traded and it is possible for traders to find competing rates from various dealers from around the world.

In more generic terms, a centralized market refers to a specialized financial market that is structured in such a way that all orders, whether they be buy or sell orders, are routed through a central exchange that has no other competing market for those particular financial instruments. Security prices that are available through and quoted by the exchange (or market) represent the only prices that are available to investors wishing to buy or sell the specific assets quoted on the exchange.

One key aspect of centralized markets is that pricing is fully transparent and available for anyone to see. Potential investors are able to see all quotes and trades and consider how those trades move in formulating their strategies. Another key component of centralized markets is the existence of a clearinghouse, which sits between buyers and sellers and guarantees the integrity of the transactions as both buyers and sellers, in effect, transact with the exchange and not with each other. The resulting benefit of reduced risk from not dealing with variable counterparties is also a key aspect of a centralized market. Other major centralized markets around the globe include stock markets such as the TSE, security and commodity markets such as the CME and the ASE. 

The Emergence of Decentralized Markets

In opposition to the centralized market model, decentralized markets are growing in step with the evolution of computer technology that is giving people the ability to participate in online commerce without the benefit of a centralized market. Instead of visiting a website that offers a central meeting place for buyers and sellers, the emerging style of decentralized markets work by connecting buyers and sellers directly to each other to trade.

This decentralized market model is achieved by running a peer-to-peer trading program on a computer. Virtual currency is also being integrated as an important aspect of emerging decentralized markets.