The term open market is used generally to refer to an economic situation close to

free trade Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...

. In a more specific, technical sense, the term refers to interbank trade in securities.

In economic theory

Economists 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 enforceable legal framework for trade which guarantees security of property, the fulfillment of contractual obligations associated with transactions, and the prevention of cheating. A physical open market is a space where anyone wishing to trade physical goods may do so free of selling charges and taxes, and has come to be regarded by many activists as the ultimate social enterprise and a major tool for tackling unemployment. In a more general sense the term has started to be used in

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

and

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...

, in which 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 market closed by a

monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...

which dominate an industry, and with a protected market in which entry is conditional on certain financial and legal requirements or which is subject to

tariff A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and p ...

barriers, taxes, levies or state subsidies which effectively prevent some economic actors from participating in them (see

protectionism Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulation ...

). 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 Free may refer to: Concept * Freedom, having the ability to do something, without having to obey anyone/anything * Freethought, a position that beliefs should be formed only on the basis of logic, reason, and empiricism * Emancipate, to procure ...

, 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.

In banking

banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

and

financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade". William F. Sharpe"Financia ...

, 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. * To intervene in the " business cycle", a

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

may choose to go into the open market and buy or sell

government bonds A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...

, which is known as open market operations to increase reserves. Open Market Operations are when the central bank buys bonds from other

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s in exchange for

cheque A cheque, or check (American English; see spelling differences) is a document that orders a bank (or credit union) to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The pers ...

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 supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

. This thus increases reserves. * Stated otherwise: To intervene in the " business cycle", a

may choose to buy (or sell) government securities from (or to) the banks which it regulates, thereby increasing (or decreasing) the reserves (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

s or electronic transactions which are cashed by these banks, moving money from the central bank to the bank reserves (not deposits) of the regulated banks.

In economic theory

In banking

See also