In economics, an open market refers to a market open to all. It is not subject to taxes, obligations, authorizations, subsidies or union interference. In practice, a market is rarely entirely free.
In finance, open market designates a banking technique of English origin. To influence interest rates, a central bank buys securities on the open market, thereby providing funds to secondary banks, which allows them to extend more credit. When a central bank sells securities, banks discount with it, reducing the available credit accordingly.
Open market operations in the broad sense refer to all those implemented by the central bank to influence the quantity of central money, banking liquidity, when they are carried out by a market mechanism.
These operations are not performed in the same way in countries and monetary zones, but they share two common points: they are always intended to influence the supply of central money and they are carried out by a market mechanism.
Open market operations are therefore initiated by the central bank in the form of purchases and sales of securities that are Treasury bills in some countries or in the form of securities lending in other monetary zones.
A repurchase is a purchase of a security by the central bank for a defined period. During this period, the banks that have sold the securities hold central money. When the maturity is reached they repay and retrieve the security until a new offer from the central bank. A repurchase thus resembles a cash loan secured by collateral.
Overall, there are two types of open market operations and they are refinancing operations, most often through repurchases corresponding either to the main operations that are conducted weekly for a duration of two weeks or to longer-term operations that are monthly and for three months
The second type of operations includes fine-tuning operations playing a less important role through outright sales and purchases of securities.
