What it means
In a healthy market, buyers and sellers meet in the middle, and there are offers to sell at a price slightly above the best bid. In a one-sided market, one side disappears.
For example, in a sudden rush to sell, bids can vanish and sellers must accept much lower prices to find anyone willing to buy. This usually happens in response to news.
A bad earnings report can cause nearly every holder to sell, while an announced takeover can cause everyone to want to buy. Market makers (firms that continuously quote buying and selling prices) may step back because the risk of trading against such a flow is too high.
The result is a wide bid-ask spread, which is the gap between the highest price buyers will pay and the lowest price sellers will accept. Wide spreads make trading more expensive, and large orders can move the price a long way.
Trading may be paused by the exchange to let information spread and orders rebalance. For finance teams, the main lesson is about liquidity risk.
A position that looks easy to sell on a normal day may be hard to sell in a one-sided market, so the value shown on the screen is not the amount received. Funds and companies that hold investments should test how quickly they could sell under stress.
The term is also used more loosely for markets where only one kind of participant is active, such as a housing market with many sellers and few buyers. The common thread is an imbalance between supply and demand that is not quickly resolved by price changes.
Exchanges and regulators have built safeguards for these situations. Circuit breakers temporarily halt trading when prices move too far too fast, and opening and closing auctions collect orders to find a single balanced price.
These tools do not remove the imbalance, but they give the market time to bring in new buyers or sellers.
In practice
Real-world examples.
Example
A small-cap company announces a failed clinical trial. Within minutes, there are hundreds of sell orders and almost no buyers. A fund holding $5 million of the stock sees the price fall 30% before it can sell any shares.
Example
A bond market becomes one-sided during a credit scare. Dealers stop quoting prices on weaker corporate bonds, and investors who need cash must accept steep discounts. The finance director of one holder writes down the value of its holdings by $2 million.
Example
A local housing market has many sellers and few buyers after a factory closes. Prices fall and homes stay on the market for months. A developer postpones a planned project until demand recovers.
Formula
Calculation
Order imbalance = (buy orders - sell orders) / (buy orders + sell orders)
Suppose a share has 9,000 shares waiting to be bought and only 1,000 shares offered for sale.
Order imbalance = (9,000 - 1,000) / (9,000 + 1,000) = 8,000 / 10,000 = 0.80, or 80%.
A value near +100% shows an almost entirely one-sided buying market, a value near -100% shows a one-sided selling market, and a value near 0% shows a balanced market.
At a price of $20, the 9,000 shares to buy are worth 9,000 x 20 = $180,000, and the 1,000 shares for sale are worth 1,000 x 20 = $20,000, so $160,000 of buying demand has no seller at that price.Case study
Seen in the real world.
Falcon Ridge Treasury is an illustrative, fictional corporate treasury team that held $10 million of a thinly traded bond as part of its cash reserve. The bond was rated as safe and normally traded within a narrow price range.
When rumours spread about the issuer, buyers withdrew, and the team saw quotes only at a price 4% below the last trade. Selling at that level would have cost $400,000, so it chose to hold the bond until the situation became clearer.
The treasurer later changed the policy to cap holdings of any one thinly traded bond at $2 million. The illustrative lesson is that liquidity can disappear when it is most needed, and a diversified, easily sold reserve is worth a lower yield.
Watch out
Common mistakes.
- Assuming the last traded price is the price at which a large position can be sold.
- Treating a one-sided market as a signal of fair value, when it often reflects panic or excitement.
- Placing market orders in such conditions, which can fill at very poor prices.
Questions
People also ask.
What causes a one-sided market?
Sudden news, fear or a shortage of market makers can leave almost all the orders on one side.
How can investors protect themselves?
They can use limit orders, hold a mix of easily sold assets and avoid concentrating in thinly traded securities.
Is a one-sided market the same as a trending market?
No, a trend is a sustained move in one direction, while a one-sided market refers to a temporary imbalance of orders that may or may not lead to a trend.
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