A centralized market is a type of national or local market in which securities and financial instruments are traded at fixed prices without any influence from competing markets. The quoted prices of securities shown on the market represent the only price available to traders seeking to buy or sell a particular security. The main centralized markets around the world are the stock markets, such as the TSE markets, the securities and commodities markets such as the CME, and the ASE. The foreign exchange market, in contrast, is a decentralized market in that there is no single physical location for investors to trade currencies.
Understanding the centralized market
The New York Stock Exchange is considered a centralized market because orders are routed to the exchange and are then matched with a clearing order. On the other hand, the foreign exchange market is not considered centralized because there is no one place where currencies are traded and it is possible for traders to find competitive rates from various dealers around the world.
In more general terms, a centralized market refers to a specialized financial market that is structured so that all orders, whether buy or sell orders, are routed through a central exchange that has no other competing markets for those particular financial instruments. The prices of securities available and quoted by the exchange (or market) represent the only prices available to investors who wish to buy or sell the specific assets listed on the exchange.
A key aspect of centralized markets is that prices are completely transparent and available to anyone. Potential investors are able to see all quotes and trades and consider how those trades move in formulating their strategies. Another key component of centralized markets is the existence of a clearinghouse, which sits between buyers and sellers and ensures the integrity of transactions because both buyers and sellers, in effect, transact with the exchange and not with each other. The benefit of reduced risk from not dealing with variable counterparties is also a key aspect of a centralized market. Other important centralized markets around the world include equity markets such as TSE, security and commodity markets such as CME and ASE.
Key points
- A centralized market is a financial market structure of having all orders routed to a central exchange with no other competing markets.
- A centralized market works to keep exchanges fair, do more business, and speed up the buying/selling process.
- Centralized markets are good for shareholders because the lack of a competitive pricing model for a single security ensures that price movements become somewhat more predictable.
- Decentralized markets have become more popular since the advent of blockchain technology, but there is less regulation and no government oversight.