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.

ordermarket.gif

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.

RELATED FAQS
  1. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
  2. What do the numbers that follow the bid and ask numbers in stock quotes represent? ...

    When looking at stock quotes, there are numbers following the bid and ask prices for a particular stock. These numbers usually ... Read Answer >>
Related Articles
  1. Trading

    The Basics Of The Bid-Ask Spread

    The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders.
  2. Trading

    The Basics Of Trading A Stock

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
  3. Investing

    How Bid Price Affects Liquidity

    The bid price is the amount a buyer will pay for a security.
  4. Investing

    Explaining Market Orders

    A market order is the most common order used to purchase a financial security.
  5. Investing

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  6. Investing

    Role Of A Market Maker

    A market maker is a firm or an individual that stands ready to buy and sell a particular security throughout the trading session to maintain liquidity and a fair and orderly market in that security. ...
  7. Personal Finance

    How Brokers Can Avoid A Market-Maker's Tricks

    Ensure that you and your clients are getting the best deal by avoiding these three pitfalls.
RELATED TERMS
  1. Order Driven Market

    A financial market where all buyers and sellers display the prices ...
  2. Quote Driven Market

    An electronic stock exchange system in which prices are determined ...
  3. Bid Price

    The price a buyer is willing to pay for a security. This is one ...
  4. Inside Quote

    The best bid and ask prices offered to buy and sell a security ...
  5. Firm Quote

    A price quote on a security, made by a dealer or market maker, ...
  6. Level 2

    A trading service consisting of real-time access to the quotations ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center