Sometimes referred to as an internally efficient market, operational efficiency is a situation within a market where investors who buy and sell in that market are able to do so at cost that is considered equitable to those investors. This type of allocational efficiency actually helps to move the market forward, since it helps to ensure that everyone participating within that market is satisfied with the costs they incur as a result of their decision to participate. It is important to note that a market may be considered efficient by some types of investors, but be considered highly inefficient by others.
An example of how operational efficiency in the marketplace functions is to consider a market in which the commission charged for trades was at a fixed rate, rather than being based on the number of shares involved with the trade. For investors who prefer to buy and sell in large blocks of shares, this fixed charge works very well, much more so than a charge based on the number of shares. For these investors, the operational efficiency of the market would be perceived as quite high. As a result, they would be prompted to execute more trades on a regular basis, stimulating the marketplace.
At the same time, this fixed commission charge could inhibit investment activity among smaller investors. Since these investors would be more likely to engage in trades that involved odd lots, or lots of securities that are less than one hundred shares, or to purchase several even lots of a hundred shares, there is no cost savings on the commission to motivate them to engage in more frequent trading. Since the cost of trading is not as attractive as it would be if the norm was a floating commission based on the number of shares involved, smaller investors would likely consider the operational efficiency of the market to be somewhat low.
One of the effects of technology and the ability to execute trades online is that trading fees and commissions are much lower than they were in times past. This means smaller investors can sometimes execute trades where the costs are considered to be in line with the perceived benefits of making the trade. To a degree, this has helped to improve the operational efficiency of many investment markets, since the lower fees allow more investors of all sizes and types to actively participate without incurring costs they consider inequitable.
Shifts in regulations can sometimes have the effect of improving the operational efficiency of the marketplace. One example is the actions taken in 2000 by the Commodity Futures Trading Commission in the United States. A new resolution passed by the CFTC make it possible for money market funds to meet margin requirements, where once only cash was considered eligible. While this change went unnoticed by many investors, it did have the effect of increasing the operational efficiency of futures markets, since it reduced the costs of buying and selling in those markets.
