Trending Videos
What Is an Arm's Length Market?
An arm's length market describes a financial market consisting of parties that have no relationship or contact with one another aside from the transaction at hand. In the United States, the majority of exchanges are considered to be arm's length, where buyers and sellers are matched according to only to the details of a transaction. The two parties will often remain anonymous - never knowing they were involved with each other. Arm's length markets go a long way in determining fair market values for assets.The transactions that take place in arm's length markets are known as arm's length transactions, in which the buyers and sellers act independently and do not have any relationship to each other.
Arm's length may be contrasted with arm-in-arm, where counterparties know each other and may have pre-existing relationships.Key Takeaways
- An arm's length market describes a financial market consisting of parties that have no relationship or contact with one another aside from the transaction at hand.
- Such a market removes opportunities for deals derived from personal relationships, which may manipulate the market, as well as taking advantage of personal relationships (either positive or negative) to influence price.
- Most stock markets, as well as some real estate markets, are considered to be arm's length.
The Basics of an Arm's Length Market
An arm's length market is based on the principle that parties should have equal influence in transactions. Furthermore, it removes opportunities for deals derived from personal relationships, which may manipulate the market, as well as taking advantage of personal relationships (either positive or negative) to influence price. Modern stock markets are considered to be the paradigm of arm's length markets since electronic trades do not reveal who the counterparty(ies) are. The expression is used specifically in contract law to arrange an agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).Tax laws throughout the world are designed to treat the results of a transaction differently when parties are dealing at arm's length and when they are not.