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Thin Market Definition
A thin market can also be called a ‘lean market’ or a ‘narrow market’. It is a market situation whereby the number of buyers and sellers are comparatively low. Due to a small number of sellers and purchasers, transactions in a thin market are also low. As a result of small participants or traders in a thin market, the prices are also moderate and volatile. That is, prices cannot be easily predicted because of few assets.
The small number of buyers and sellers in a thin market results in low transaction volume, low bid volumes as well as less liquid in the market.
A Little More on What is a Thin Market
Unlike the liquid market which is characterised by a high rate of sellers and purchasers, high liquidity and lower price volatility, the thin market has relatively low buyers and sellers. The major features of a thin market are high price vulnerability and low liquidity. There is also a low number of bids and asks in this market. Due to the number of buyers and sellers that partake in a thin market, supply and demand tend to change unpredictably because transaction in this market might not suit potential buyers and sellers.
Trading in a thin market often require price concessions from traders in the market, these price concessions and other acts that traders engage in tend to have noticeable impacts on the market prices. Market thinness lacks liquidity which refers to ease in trading security in a market, hence, thinness of market give rise to illiquidity. Market data however reveal that institutional investors and the trading strategies they exhibit have a significant impact on thin market prices. For instance, when the rate of buying or selling offers is small as seen in a thin market, the positions of investors trading in the market are large relative to market size.
References for Thin Market
Academic Research on Thin Market
Announcement effects and market efficiency in a thin market: An empirical application to the Singapore equity market, Ariff, M., & Finn, F. J. (1989). Asia Pacific Journal of Management, 6(2), 243-265.
Thick and thin market nonatomic exchange economies, Gretsky, N. E., & Ostroy, J. M. (1985). In Advances in equilibrium theory (pp. 107-129). Springer, Berlin, Heidelberg.
Experimental examination of a thin market: Price behavior in a declining terminal market revisited, Nelson, R. G., & Turner, S. C. (1995). Journal of agricultural and applied economics, 27(1), 149-160.
Thin capital markets: a case study of the Kuwaiti stock market, Gandhi, D. K., Saunders, A., & Woodward, R. S. (1980). Applied Economics, 12(3), 341-349.
Pricing efficiency in a thin market with competitive market makers: box spread strategies in the Hang Seng index options market, Fung, J. K., Mok, H. M., & Wong, K. C. (2004). Financial Review, 39(3), 435-454.
A not intractable problem: reasonable certainty, tractebel, and the problem of damages for anticipatory breach of a long-term contract in a thin market, Milikowsky, M. (2008). Colum. L. Rev., 108, 452.
Role of thin commodity futures markets in physical market price making: An analysis of wheat futures in India in the post-ban era, Ghosh, N. (2010). Takshashila Academia of Economic Research (TAER), Working Paper, 6, 1-16.
Local productivity differences through thick and thin: market size, entry costs and openness to trade, Accetturo, A., Di Giacinto, V., Micucci, G., & Pagnini, M. (2011).
Usefulness and feasibility of market maker in a thin market, Nakajima, Y., & Shiozawa, Y. (2004). In ICEES (International Conference Experiments in Economic Sciences)(Vol. 47).
Making a Thin Market Intentionally: a Challenge of the U-Mart Project, Shiozawa, Y. (2004). In 9th Workshop on Economic Heterogeneous Interacting Agents.