Does trading constitute a market?

When a market for securities, commodities, etc. trades actively, daily, with willing buyers & sellers engaging each other in an exchange of ownership interests, does it inherently constitute a legitimate market?

Are there qualitative factors that bear on the validation of a market as legitimate? Including that market’s capacity to be relied on as a measure of genuine fair value, off of which balance sheets, P&L’s and asset values are based?

To say that the mere presence of active traders willing to take on risk of ownership, for a day, a week or just a few ticks of the clock constitutes a market, indicates the trade in donkeys and firearms in Afghanistan is just as valid and reliable a market for determining fair value in arms-length transactions as the floors of the NYSE or CME.

An active market’s validity is baked in to reporting standards relating to fair value. The FASB & SEC standard setting process works on the fundamental notion that level 1 markets are the objective basis upon which valuation takes place. It does not make room for macroeconomic shifts that can alter a market’s capacity to function as a true level 1 measure.

In 2005 MBS, CDO’s etc were priced and valued off of a helium filled housing market, which was widely understood by those that cared to look. While this did not provide for writing up asset values, it acted as false evidence supporting balance sheet values at cost. in 2012, the surplus of REO on banks balance sheets and lender’s new religion of restrictive lending standards re: home loans have made home valuations again unrepresentative, to the downside this time.

In the commodity markets a canyon has opened up between the pricing of oil & natural gas. Historically the price curves for these two were highly positively correlated. Currently they bear little relationship to their history, ostensibly because of shale’s effect on supply for nat gas. However, the political volatility of oil producing nations also provides a terrific fear gradient that is the preferred fuel for traders.

Then there is the equity markets, which have traded daily for three years now on vastly reduced volumes, while zigging & zagging off of the next best headline. Again, a trader needs volatility to make money. Hills and valleys provide the movement necessary to take a gain.

And then there is gold….a haven…a place where money runs to preserve itself under the notion that if it all falls apart, the gold bars will be the only currency that will be honored - and price elevates rapidly as more hands reach for limited amounts of the asset. Isn’t this what played out in tech stocks, houses, natural gas…etc…

What to make of markets that trade for the sake of trading and related gains rather than representing price as a function of end user natural supply & demand? And what of reporting standards that inherently rely on these markets to value balance sheets and the securities underlying them?

It implies that a market defines value, even when it does not accurately represent it. Which sounds a lot like what a black market does. Hard to build a sustainable economic recovery off of a foundation of sand such as that.