A financial system that is ‘operationally efficient’ is characterized by securities and assets that have ‘informationally efficient’ prices which lead to an economy that is ‘allocationally efficient’. The well-functioning financial systems are complete markets and have all the assets and contracts that exist to satisfy all the participants such as savers, borrowers, hedgers, and spot asset exchangers. Thus some of the important features of a well functioning system are:
a. Timely and Accurate Disclosures. This adds transparency and supports information efficiency in the markets.
b. Liquidity. The well-functioning markets should have enough liquidity. This increases the operational efficiency and minimizes the transaction cost.
c. Complete Markets. The markets should be complete and should satisfy the requirements of all its participants.
d. External Information Efficiency. The prices in the markets should reflect all the available information.
e. Availability of intermediaries. There should be enough intermediaries who can:
i. match the buyers and sellers by organizing exchanges, brokerages, and alternative trading systems;
ii. are willing to make markets and provide liquidity on demand;
iii. create products to match the buyers and sellers, such as assets backed securities;
iv. accept deposits and make loans;
v. provide insurance services;
vi. provide advisory services;
vii. organize clearing houses for settlement of transactions;
viii. provide custodial and depository services; etc.