What Is a One-Way Market?
A one-way market, or one-sided market, is a market for a security in which market makers only quote either the bid or the ask price. One-way markets arise when the market is moving strongly in a certain direction.
By contrast, a two-sided market is one where both the bid and ask are quoted.
- A one-way market, or one-sided market, is a market for a security in which market makers only quote either the bid or the ask price.
- A common example of a one-way market is when market makers are offering shares in an IPO for which there is strong investor demand.
- One-way markets can also arise in situations where fear has taken over the market, such as when an asset bubble collapses.
- Market makers mitigate the risk of one-way markets by charging a wider spread between their bid and ask prices.
How One-Way Markets Work
One-way markets occur when there are only potential buyers or sellers interested in a particular security, but not both. Although these situations are relatively uncommon, they occasionally occur in relation to the initial public offerings (IPOs) of hotly anticipated companies.
More generally, one-way markets are associated with periods of extreme enthusiasm or fear, such as the dotcom bubble of the late 1990s and its subsequent collapse.
In the run-up to the dotcom bubble, buyers vastly outnumbered sellers, as nearly all stocks were rising rapidly regardless of their fundamentals. Once the bubble burst, the situation reversed, with almost everyone wishing to sell and very few willing to buy.
The term one-way market is sometimes used in a more general sense, to refer to a market that is strongly heading in a particular direction. By this definition, the dot-com bubble was a one-way market prior to its sudden collapse.
When buyers outstrip sellers, a market maker might make rapid profits by selling their sought-after inventory at ever-higher prices. However, if the momentum turns and investors sell their shares at ever-dwindling prices, the market maker might be left with a pile of virtually worthless shares.
To mitigate against this risk, market makers generally charge a higher bid-ask spread when dealing in one-way markets.