Centralized Markets

Centralized market is a specific type of a financial market. All markets are places where buyers and sellers meet to exchange goods, products and services. For instance, London Metal Exchange is a centralized market for gold.

A centralized market is a specialized financial market which is structured in such a way that all orders, whether they be buy or sell orders, are routed through a central exchange which has no other competing market for those particular financial instruments. The prices of the various securities quoted by the exchange (or market) represent the only prices which are available to investors wishing to buy or sell the specific assets quoted on the exchange.

The world’s stock markets such as the New York Stock Exchange are considered to be centralized markets as orders are routed through the exchange with each buying order off – set by a sell order. Other markets, such as that for foreign currency are said to be fragmented as there is no single location where currencies are traded and it is possible for traders to find competing rates from dealers around the world.

A key feature of centralized markets is that all participants know the price and are able to see all quotes and trades and take these into account in their strategies. Another key component of centralized markets is the existence of a clearing house which sits between buyers and sellers and guarantees the integrity of the transactions as both buyers and sellers in effect, transact with the exchange and not with each other, thus reducing counterparty risk.