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What is a frictionless market?

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.

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