Open market
Encyclopedia
The term open market is used generally to refer to a situation close to free trade
and in a more specific technical sense to interbank trade in securities.
and political economy
, an open market refers to a market which is accessible to all economic actors. In an open market so defined, all economic actors have an equal opportunity of entry in that market. This contrasts with a protected market in which entry is conditional on certain financial and legal requirements or which is subject to tariff
barriers, taxes, levies or state [subsidies] which effectively prevent some economic actors from participating in them (see [protectionism]). Economists then judge the "openness" of markets according to the amount of [government regulation] of those markets, the scope for competition, and the absence or presence of local cultural customs which get in the way of trade. In principle, a fully open market is a completely free market in which all economic actors can trade without any external constraint. In reality, few markets exist which are open to that extent, since they usually cannot operate without an enforcible legal framework for trade which guarantees security of property, the fulfillment of contractual obligations associated with transactions, and the prevention of cheating
.
The concept of an open market in this general sense is sometimes criticized on the ground that participation in it is conditional on having sufficient money, income or assets. Lacking sufficient money, income or assets, people may be effectively excluded from participation. Thus, whereas people may have sufficient funds to participate in some markets, their funds are inadequate to participate in other markets. This raises the question of whether markets are ever truly "open", and suggests that the "openness" of markets is more a relative concept. In response to this type of criticism, the concept of open market is often redefined to mean a situation of free competition, and the inability to participate is explained as a lack of competitiveness. On this view, if people were more competitive they would be able to participate, and thus their lack of funds is due to their unwillingness to compete for resources. On this view, lack of participation in an open market is either a subjective preference or a personal defect.
, the open market is the term used to refer to the environment in which bonds
are bought and sold between a central bank and its regulated banks. It is not a free market process.
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
and in a more specific technical sense to interbank trade in securities.
Use of the term in economic theory
In a general sense used in economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
, an open market refers to a market which is accessible to all economic actors. In an open market so defined, all economic actors have an equal opportunity of entry in that market. This contrasts with a protected market in which entry is conditional on certain financial and legal requirements or which is subject to tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
barriers, taxes, levies or state [subsidies] which effectively prevent some economic actors from participating in them (see [protectionism]). Economists then judge the "openness" of markets according to the amount of [government regulation] of those markets, the scope for competition, and the absence or presence of local cultural customs which get in the way of trade. In principle, a fully open market is a completely free market in which all economic actors can trade without any external constraint. In reality, few markets exist which are open to that extent, since they usually cannot operate without an enforcible legal framework for trade which guarantees security of property, the fulfillment of contractual obligations associated with transactions, and the prevention of cheating
Cheating
Cheating refers to the breaking of rules to gain advantage in a competitive situation. The rules infringed may be explicit, or they may be from an unwritten code of conduct based on morality, ethics or custom, making the identification of cheating a subjective process. Cheating can refer...
.
The concept of an open market in this general sense is sometimes criticized on the ground that participation in it is conditional on having sufficient money, income or assets. Lacking sufficient money, income or assets, people may be effectively excluded from participation. Thus, whereas people may have sufficient funds to participate in some markets, their funds are inadequate to participate in other markets. This raises the question of whether markets are ever truly "open", and suggests that the "openness" of markets is more a relative concept. In response to this type of criticism, the concept of open market is often redefined to mean a situation of free competition, and the inability to participate is explained as a lack of competitiveness. On this view, if people were more competitive they would be able to participate, and thus their lack of funds is due to their unwillingness to compete for resources. On this view, lack of participation in an open market is either a subjective preference or a personal defect.
Use of the term in banking
In banking and financial economicsFinancial economics
Financial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
, the open market is the term used to refer to the environment in which bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
are bought and sold between a central bank and its regulated banks. It is not a free market process.
- To intervene in the "business cycleBusiness cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
", a central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
may choose to go into the open market and buy or sell government bonds, which is known as open market operations to increase reserves. Open Market Operations are when the central bank buys bonds from other bankBankA bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s in exchange for chequeChequeA cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
s. These local banks then cash the cheques, which allow them to take money from the central bank. This action thus decreases any credit the local banks may owe to the central bank, and also increases their money supplyMoney supplyIn economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
. This thus increases reserves.
- Stated otherwise: To intervene in the "business cycleBusiness cycleThe term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
", a central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
may choose to buy (or sell) government securities from (or to) the banks which it regulates, thereby increasing (or decreasing) the reservesBank reservesBank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
(not deposits) of those banks; the regulated banks must comply with the buy & sell orders of the central bank. This process is known as open market operations. For example, a central bank may command its regulated banks to sell government bonds or bills to the central bank, which pays with chequeChequeA cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
s or electronic transactions which are cashed by these banks, moving money from the central bank to the bank reservesBank reservesBank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
(not deposits) of the regulated banks.
See also
- Free marketFree marketA free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
- Money marketMoney marketThe money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
- Open MarketOpenMarketOpen Market was an ecommerce startup, founded in Cambridge, Massachusetts in early 1994. It went public in 1996 on the Nasdaq exchange under the symbol OMKT, as one of the first ecommerce IPOs...
(an early ecommerce company)