What is a One-Sided Market?
One-sided markets can be volatile and very stressful for market makers. Market makers are obligated to facilitate trading in particular 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 and the is the only one selling, the is likely able to sell the for a very high price in this type of one-sided market. This in turn means, however, that investors likely pay a very high price.
How Does a One-Sided Market Work?
Let's say Company XYZ is a pharmaceutical company that has been researching cures for cancer. After 30 years of experiments, it makes a key discovery that enables it to create and patent a cancer vaccine that is 90% effective. This is a revolutionary discovery that save millions of lives immediately, and because the invention is patented, Company XYZ be the only supplier of the vaccine, which 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-sided market. The financial institutions that act as makers for Company XYZ have an obligation to facilitate trades and thus act as sellers. Accordingly, they only present an price for the shares in their inventory.
Why Does a One-Sided Market Matter?
Also called a one-way market makers only show a bid or an price rather than both. In broader , the concept refers to situations in which the entire is strongly heading in a certain direction., a one-sided market is a in which