What is a 'Shadow Market'

A shadow market includes any unregulated private market in which individuals or entities can purchase assets or property that is not currently publicly traded. The purpose of a shadow market is to shield participants from the oversight and transparency of conventional marketplaces which often include significant documentation. Because activity and transactions on a shadow market occur largely unrecognized, it offers participants the opportunity for strategies or schemes otherwise unavailable in public markets.

BREAKING DOWN 'Shadow Market'

A shadow market may describe a simple transaction between two individuals, such as one party agreeing to purchase an asset without the burden of standard methods. Or a shadow market can be international in size. For instance, in high-finance, there's regular discussion of global power brokers reshuffling global financial wealth and power, all with implicit or explicit knowledge of public market regulators.

Although the expression, shadow market, elicits illegal or otherwise shady business arrangements, not all shadow markets are nefarious in nature. A robust shadow banking system of non-bank financial intermediaries provides similar services to traditional banks; with the added benefit of convenience and access at a discounted price. Many financiers in this space take issue with the expression "shadow banking," as if they're back alley loan sharks. Although the shadow market for mortgages did play a primary role leading up to the subprime mortgage crisis of 2007-2008 and the global recession that followed.

When times are good, shadow markets or systems generally operate without much scrutiny. When the economy tanks, they're a usual suspect.

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