There is often a presumption among those operating and championing public markets, that they are better than the alternative bilateral markets that they often compete against, but is this always true?

Yes, a public market can bring buyers and sellers together in a single place that requires a lot of bilateral interactions, but if that congregation is at a cost of communication (including physical travel & time) and market fees that outweighs the alternative then people may not use it.  This is one of the reasons used by people who bypass livestock markets, an area we have been looking at recently.

The idea that a public market levels the playing field is generally true (subject to the market’s rules and practices), but many would also state that a public market would lead to higher (and fairer) asset prices.  This is on the basis that if you lower the costs of doing the business (as an efficient public market would do), then people are prepared to pay more for the asset concerned (as their total spend has not gone up).  However if the market is not more efficient than the bilateral alternative, then this may not be the case.

The two market models need not be seen as conflicting in any case.  The people trading bilaterally are also often customers of the public market and vice versa, who are just trying to buy or sell their assets.  Market operators need to provide them with a choice of means by which to do so as one size rarely fits all.

Then there is the conundrum of the transparent market price.  Most participants want this to exist, but this may be just so that they get a firm basis on which to start bilateral negotiation.  If the bilateral market gets too strong then the public price weakens and big players can start to exploit their market power over prices to the detriment of the smaller players who no longer have such a good public market option.

These arguments have been going on in financial markets (particularly equities) for decades and there is now presumption in many regulations for public transparency.  However, in the murkier financial areas and in many commercial and physical markets there is no such presumption.

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