Recorded history has revealed that markets are a development from ancient times when people came together at fixed times and fixed places to barter the surplus goods or commodities which they possessed. The creation of coinage or money allowed the markets to move from barter-based to transactions-based. Today, food stalls are still open in small markets around the globe to sell (or barter) agricultural goods and other items in much the same manner as they operated centuries ago.
While these tiny markets in remote locations around the world might look primitive, as we know, first impressions can be misleading. A closer examination would likely reveal them to be an intricate and complex market system. The stallholders are not likely to be just retailers, but also wholesalers who buy in bulk in order to sell smaller quantities to consumers at higher prices. They also typically aggregate smaller purchases for resale to other sellers – and they effectively maintain a bid/ask market system.
Similarly, today’s financial markets operate in a like manner. Dealers post prices at which they are willing to buy or sell a specific security. They hold inventories and provide liquidity and transparency by quoting prices at which they are willing to make a market in a security – indicating both the price at which they will buy the security (the “bid” price) and the price at which they will sell the security (the “ask” price). Common stocks, bonds and foreign currencies trade primarily in these types of dealer markets.
So the next time you are visiting a local farmers’ market on a Saturday morning, take a closer look at the market participants and begin to appreciate the effectiveness and efficiency of the market system. You’d be amazed at how similar its operating dynamics are to those of NASDAQ or the U.S. government bond market!