The close market is any investment market that is currently characterized by a narrow spread situation. This normally involves a very limited difference in the spread between bid prices and offer prices. Several different factors can come together and create a close market situation that may last for a short time or remain in place for an extended period of time.
One of the factors that can help create a close market is the amount of trading currently taking place in the market. When the volume of trading is at a low or moderate level, there is no real incentive for a close market situation to develop, since bid and offer prices are likely to differ more in range. However, a high volume of trading activity will promote a great deal of competition for the investments that make up the market. That high volume means that bidding and offer pricing will begin to narrow somewhat.
Along with the volume level of trading within the close market, various other market makers may also influence the spread between bid and offer prices. Narrow spreads may be impacted by such factors as political unrest, devaluation of currency, or acts of nature that impact the value of the underlying security associated with some of the major investment opportunities that account for most of the trading in the market. Often, the appearance of one market maker can lead to the appearance of other factors that combine to help create the close market.
The concept of the close market is in direct opposition to an open market. Markets that are considered open feature wide spreads rather than narrow spreads. The wide spread between bid and offer prices is not necessarily better or worse than the narrow spreads that are found in close markets. Depending on the position of the investor, it is possible to make profitable acquisitions and sales in both types of markets. As with all investment strategies, the investor should evaluate the situation thoroughly before placing an order with the broker.
