Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

One-Way Market

What it is:

One-way markets can be volatile and very stressful for market makers. Market makers are obligated to facilitate trading in particular stocks even if doing so is inconvenient or less profitable. In our example, it can also be very profitable for market makers: if everybody wants to buy the stock and the market maker is the only one selling, the market maker is likely able to sell the shares for a very high price in this type of one-way market. This in turn means, however, that investors will likely pay a very high price.

How it works (Example):

Let's say Company XYZ is a pharmaceutical company that has been researching cures for cancer. After 30 years of experiments, it finally makes a key discovery that enables it to create and patent a cancer vaccine that is 90% effective. This is a revolutionary discovery that will save millions of lives immediately, and because the invention is patented, Company XYZ will be the only supplier of the vaccine, which puts it in a very lucrative position.

Accordingly, once the news gets out, virtually every investor wants to buy shares of Company XYZ and nobody wants to sell. This creates a one-way market. The financial institutions that act as market makers for Company XYZ have an obligation to facilitate trades and thus act as sellers. Accordingly, they only present an offer price for the shares in their inventory.

Why it Matters:

Also called a one-sided market, a one-way market is a market in which market makers only show a bid or an offer price rather than both. In broader terms, the concept refers to situations in which the entire market is strongly heading in a certain direction.