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. This happens when the entire market is moving strongly in a certain direction, with little resistance. In contrast, in a two-sided market, both an open bid and an open ask are quoted.
BREAKING DOWN One-Way Market
One-way markets occur when there are only potential buyers or sellers interested in a particular asset or security at a specific point in time — but not both — such as in an initial public offering (IPO), or when there are temporary market inefficiencies. During the dotcom bubble in the late 1990s, nearly every stock was rising every day, regardless of fundamentals.
Market makers make a higher spread in one-way markets, because investors are in a take-it-or-leave-it position. For example, when there is huge demand for an IPO, market makers are the only sellers because everyone wants to buy the stock. Because market makers are obligated to maintain two-sided markets, to facilitate trading in stocks, they can lose money in one-way markets, such as when there is a big sell-off and market volatility rises and liquidity falls. This is why bid-ask spreads widen, to compensate, increasing the trading cost for the investor.