What Is a Two-Sided Market?

Two-Sided Markets Explained in Less Than 4 Minutes

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A two-sided market involves two parties coming together through an intermediary platform, such as stock buyers and sellers connected through a stock exchange. Both of these parties are needed to make a two-sided market work.

Keep reading to understand how a two-sided market can help investors get a better sense of their roles in financial transactions.

Definition and Examples of a Two-Sided Market

A two-sided market centers on an intermediary connecting two types of customers or market participants. Generally, both sides of a two-sided market coming together strengthen the platform as a whole for the benefit of each side.

For example, a stock exchange needs both buyers and sellers to function.

If only buyers submitted orders via the New York Stock Exchange, the transactions couldn’t go through because there would be no sellers, and the exchange wouldn’t survive.

Two-sided markets are also common in many areas outside of investing, and they don’t have to strictly involve buyers and sellers interacting the way they might through a stock exchange.

For example, a payments app might need to create a two-sided market. It would need enough merchants to sign up to accept payments through the platform and enough consumers who use the payments app. The more individuals who use a service like Apple Pay at stores, the more stores might be willing to accept Apple Pay as a payment option. And if more stores accept a service like Apple Pay, more customers might use it.

In contrast, a one-sided market involves more direct relationships where buyers and sellers engage without an intermediary. For example, a hedge fund might attract investors directly rather than raising capital through an exchange.

How Does a Two-Sided Market Work?

A two-sided market can be somewhat of a chicken-or-the-egg scenario. For a marketplace or another type of intermediary to function to its full potential, it needs to attract both sides.

If an e-commerce marketplace had tons of sellers but few buyers, those sellers might look for a new marketplace. And if a payments platform has plenty of users but few stores that accept this payment option, consumers might switch to another form of payment.

So a two-sided market often needs to attract both sides at once or offer some sort of incentive to keep one side patient as the other side trickles in. Established two-sided markets, such as the major U.S. stock exchanges, typically have enough buyers and sellers to allow for easy trading.

As new exchanges emerge, such as in the cryptocurrency space, they will need to attract both buyers and sellers to create two-sided markets. An exchange with too much of an imbalance can create liquidity problems.

If you wanted to sell a currency, stock shares, or anything else in a market that has few buyers, it might take a while to complete the transaction. In contrast, a healthy two-sided market could allow you to sell a popular stock or mutual fund almost instantly.

What Does a Two-Sided Market Mean for You?

Individuals can play important roles within two-sided markets. In some cases, you might act as the buyer; in others, the seller. This participation can help a marketplace operate efficiently.

With established two-sided markets like major U.S. stock exchanges, you can generally be confident that someone will be on the other side of the transaction you want to make, whether that’s buying or selling.

If you participate in other types of two-sided markets, like ridesharing apps, you might notice there’s not always enough balance to make these markets function smoothly. In a sparsely populated area with few drivers available, you might not be able to complete the transaction as quickly as you could in a big city with plenty of nearby drivers.

So if you participate in a two-sided market, as opposed to connecting directly with the other party, know that you’ll need to rely on the intermediary to have sufficient supply or demand.

Key Takeaways

  • A two-sided market involves an intermediary connecting two types of market participants that both need each other.
  • An imbalance on either side of a two-sided market can lead to problems, like a lack of liquidity for sellers struggling to connect to buyers.
  • Two-sided markets can exist both within the investing world and in many other aspects of life where platforms connect two parties.