Tight Market (Trading) - Explained
What is a Tight Market?
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Table of ContentsWhat is a Tight Market?How Does a Tight Market Work?Notable Characteristics of a Tight Market
What is a Tight Market?
A tight market is defined as a market with high trading volume and narrow bid and ask margins. One characteristic of the tight market is abundant liquidity and high competition on both the buyers and sellers part. The term may also indicate a physical market where the demands are higher than supply thereby resulting in a higher price.
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How Does a Tight Market Work?
The tight market is a characteristic of most blue-chip stocks. The security or stocks have large trading volumes since there is usually a high level of bidding and asking done by the buyers and sellers. In a rapid market decline or advancement, the bid-ask spread widens. Some of the conditions that may occasionally cause a change in the market are; change in stock price and geopolitical change. The market will go back to normal when the situations are cleared up and conditions are stabilized.
Notable Characteristics of a Tight Market
There are some important qualities of the tight market that traders and market participants must know, these are;
- Liquidity in a market is influenced by several factors such as, inflation, proprietary trading and downgrades on credit trading which may result in high or low-level liquidity
- Low-level liquidity has a wider spread. The lower the liquidity in the market, the wider the bid-ask spread
- In highly liquid stocks, the trade executions the buyers and sellers are involved in are not the impactful
Some experts are of the view that narrow margins with high-frequency trades are volatile and susceptible to change which will affect the price. This phenomenon has been refuted since available data do not support the view that tight market prices are influenced by a false impression of high supply and demand. A change in fundamentals or physical shortage of supply and excess demand may cause a physical tight market.