Regulated Market

A regulated market is a marketplace that operates under the administrative control of the government or another designated public authority. In such markets, rules, processes, procedures, and provisions are established by the controlling authority to govern the activities within the market.

Regulations in these markets determine the participants and the overall functioning of the market. By regulating the market, illegal activities and unethical practices are minimized. Regulations also help establish fair pricing, which can reduce market charges. Additionally, regulatory measures aim to prevent financial panics and the collapse of the economic system.

A regulated market is a marketplace controlled by laws or provisions set by a public institution, agency, or body. These markets can vary in type and include agricultural markets, commodities markets, and capital markets. They play a crucial role in monitoring, regulating, controlling, and overseeing financial and economic systems. The primary goals of regulations are to eliminate unfair practices, facilitate transactions between parties, and reduce transaction costs.

A regulated market helps prevent seller and buyer panics, unfair trading practices, and the abuse of dominant positions. Preventing these issues is preferable to correcting them later, as the consequences can be significant and complex to rectify. These markets are integral to the economic system and the basic functioning of a government.

In agricultural and industrial markets, regulations often provide specific freedoms for participants. These regulations oversee the marketing of goods and services, ensuring consumer rights are protected, product quality standards are maintained, and worker safety is ensured. There are also provisions for minimizing harmful environmental impacts.

It controls demand and supply forces and regulates market actions, including firm entry and exit, pricing mechanisms, and redressal processes. Regulations may change frequently and can vary by region. In the U.S., the Securities and Exchange Commission (SEC) regulates capital markets, while the Food and Drug Administration (FDA) oversees the safety and efficacy of drugs and food.

Given below are some of the features of a regulated market:

• Regulatory oversight: They are regulated and subject to law scrutiny, typically controlled by committees, commissions, boards, or other regulatory bodies.
• Rule-making authority: These regulatory bodies lay down rules, charges, rates, and commissions for market participants.
• Administrative tenure: Administrators or regulatory bodies are often appointed for specific periods to manage the market.
• Participant regulations: There are established rules for the entry, exit, and functioning of participants in the market.
• Transparency and stability: It promotes transparency through clear frameworks, contributing to economic stability.
• Compliance enforcement: They enforce compliance with established rules and regulations.
• Protection of stakeholders: It protects producers, consumers, investors, and companies from unfair practices and market abuses.

Let us look at some examples to understand the concept better.

Example #1

Suppose there is a town in the USA where farmers grow various crops such as corn, berries, and apples. These farmers need help finding adequate sales for their produce due to a lack of technical knowledge to integrate their produce in one place. Additionally, some middlemen exploit them by buying their produce at low prices and selling it at higher prices elsewhere, disrupting the supply and demand balance and leading to artificial inflation.

To address these issues, the government, which controls these agricultural markets, has decided to open an online marketplace. Farmers are required to register as sellers on this platform and list their products with quoted prices. Buyers can then select the desired quotes and purchase the items directly from the farmers. This system ensures transparency and guarantees that farmers receive fair payments for their produce.

Example #2

On May 27, Romanian dairy producer Albalact announced its shares would move from the over-the-counter market Rasdaq to the regulated market of the Bucharest Stock Exchange on June 3. This decision, approved by the company's shareholders in February and endorsed by the Romanian financial supervision authority earlier this month, follows a new law requiring companies on Rasdaq to transition to the regulated market, the alternative trading system (ATS), or become private. Albalact, Romania's second-largest dairy producer, expects this move to attract new investments needed for further development. The company projects a turnover of 508.6 million lei ($124.5 million) for the year, up from 474.9 million lei in 2014, driven by its diverse product portfolio, which includes brands like Zuzu, Fulga, Raraul, De Albalact, and Poiana Florilor.

Given below are some of the advantages and disadvantages of a market that is regulated:

Advantages

• Consumer protection is ensured. The provisions laid down by the governing body protect consumer rights.
• Standards and safety are ensured. Regulations lay down specific standards to ensure product quality, which in turn ensures customer safety. 
• Stabilize a country's economy and prevent the market from being consumed by excessive volatility. 
• It culminates the dominant behavior of certain parties and results in the efficient functioning of markets.
• It encourages fair market practices.
• It gives a rational structure of function that helps in the smooth working of activities.

Disadvantages

• It may restrict innovation as regulations can be exhausting and costly to maintain.
• Periodic compliance may be cumbersome, although it ensures standards.

The differences between both the concepts are given as follows:

• Government regulations control regulated markets, whereas free markets have minimal or no government intervention.
• In markets that are regulated, the forces of demand and supply influence market events, but the government regulates their impact to stabilize the market and ensure fair practices. In free markets, the forces of demand and supply are unrestricted and directly impact market functioning.
• Markets that are regulated impose restrictions on the entry and exit of market firms. In contrast, free markets have no barriers to the entry or exit of firms.
• Markets that are regulated must strictly adhere to established rules and regulations. Free markets, however, do not have such strict regulations when there is zero government control.
• Exchange transactions are restricted in regulated markets, while free markets allow voluntary, unrestricted, or less restricted exchange transactions.