Market Efficiency
Though there are various markets present in the financial system, the ease with which the transfer of funds take place depends on the level of efficiency present in the financial markets. A market is considered as perfect if it has the following characteristics:
- All players in the market are price takers.
- This situation will be possible when all the players in the market have all the information relating to the security and the market price of the security reflects all the available information.
- No significant regulations on the transfer of funds exists.
- The flow of funds within the market and between the markets should not be restricted by government regulations. There should be free flow of funds from one market to the other.
- Very low/insignificant transaction costs.
Finally, transaction costs will depend on the trading and settlement processes. Transparency in the trading mechanism and shorter settlement periods are critical for low transaction costs.
However, most of the financial markets are still imperfect and are yet to be developed. The imperfections present in the markets may have an adverse impact on the players of these markets. Further, due to the interlinkage of the financial markets, the factors affecting one market may have a direct or indirect impact on the others also.