What is a frictionless market?
An ideal trading environment in which there are no costs or other restraints on transactions. A frictionless market is a theoretical concept.
Where have you heard about frictionless markets?
Bill Gates first coined the term ‘friction-free capitalism’ to predict the impact the internet would have in improving the effieciency of market processes. Although the internet has contributed to reducing friction in many markets, a true ‘frictionless’ market remains a theoretical concept.
What you need to know about a frictionless market.
In a frictionless market, there are no costs or other restraints to transactions. According to economic theory, ‘friction’, in the form of restrictive regulations, imperfect information and cost, is a barrier to efficient financial markets.
Globalisation and the internet have promoted a more competitive and frictionless market. Discount brokers with low commissions have increased accessibility and reduced barriers to trading. But as there will always be certain costs and constraints, a truly frictionless market does not exist.
Find out more about frictionless markets.
The Black-Scholes model assumes a frictionless market. Find out more about this price variation model in our definition.