What is the difference between a quote driven market and an order driven one?

By Chad Langager AAA
A:

The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask prices. The order driven market displays all of the bids and asks, while the quote driven market focuses only on the bids and asks of market makers and other designated parties.

An order driven market is one in which all of the orders of both buyers and sellers are displayed, detailing the price at which they are willing to buy or sell a security and the amount of the security that they are willing to buy or sell at that price. So, if you place an order for 100 shares of Microsoft at $30 per share, your order will be displayed in the market and can be seen by people with access to this level of information. The biggest advantage to this system is its transparency: it clearly shows all of the market orders and what price people are willing to buy at or sell for. The drawback is that in an order driven market, there is no guarantee of order execution - but, in the quote driven market, there is that guarantee.

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In the table above, all of the buy and sell orders are displayed showing the price and share amount of the order. So, according to what we see in the table, someone could come into the market and buy 59,100 shares for $42.65.

A quote driven market only displays the bid and ask offers of designated market makers, dealers or specialists. These market makers will post the bid and ask price that they are willing to accept at that time. In this market, your order for 100 shares of Microsoft at $30 per share will not be seen in the market. However, if there were one market maker for the stock, it would post its bid - say, $29.50 - and its ask - say, $30.50. (This would be all that would be displayed in the market, unless there were more than one market maker, in which case you could see more than one bid or ask offer.) This would mean that you could buy shares of Microsoft for $30.50 and sell shares for $29.50. But, bear in mind that the bid and ask will change constantly depending on the supply and demand in the market.

Even though individual orders are not seen in a quote driven market, the market maker will either fill your order from its own inventory or match you with another order. The major advantage of this type of market is the liquidity it presents as the market makers are required to meet their quoted prices either buying or selling. The major drawback of the quote driven market is that, unlike the order driven market, it does not show transparency in the market.

There are markets that combine attributes from the two systems to form hybrid systems. For example, a market may show the current bid and ask prices of the market makers but also allow people to view all of the limit orders in the market.

To learn more, see Understanding Order Execution and The Basics Of Order Entry.

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