A quote-driven market, also referred to as a price-driven market, is an electronic system where market prices are primarily influenced by bids and ask quotations provided by market makers, dealers, or specialists. In this type of market, dealers fulfill orders from their own inventory or match them with other existing orders. Contrastingly, order-driven markets list individual investor bids, ask prices, and share quantities available for trade.
Key Takeaways
- In a quote-driven market, trades are orchestrated by market professionals such as dealers and specialists, rather than individual investors directly controlling transactions.
- This market type contrasts with order-driven markets, which focus on individual investor requests, including specific bid and ask prices, and quantities of shares for trading.
- Dealers partner with financial institutions like banks and brokers to generate quotes for various securities, enabling investors to trade at these quoted prices or engage in negotiations through their agents.
- Markets for bonds, currencies, and commodities typically operate as quote-driven markets, whereas stock markets often employ order-driven systems or hybrid models combining both approaches.
Gaining Insight into a Quote-Driven Market
Quote-driven markets primarily serve bonds, currencies, and commodity exchanges, often termed dealer’s markets due to their indispensable role in transaction facilitation. Dealers in these markets, usually aligned with investment banks, commercial banks, or broker-dealers, circulate quotes for diverse instruments, dictating transactional prices for all traders. Customers rely on these quotes for trading activities, leading to robust market liquidity.
Key Characteristics of Quote-Driven Markets:
- Traders can accept the quoted prices by dealers or seek better terms via negotiations either personally or through brokers or agents.
- In a strict quote-driven market, trades must be executed exclusively through dealers, although dealers may engage in inter-dealer trading via inter-dealer brokers.
- Dealers shoulder the responsibility for supplying market liquidity, making it vital for uninterrupted market processes.
Certain dealers may refuse trades for specific clients, preferentially handling clients from either retail or institutional segments. Hybrid markets like NYSE and Nasdaq effectively amalgamate facets of both quote-driven and order-driven systems.
Quote-Driven vs. Order-Driven Markets: A Comparative Look
Order execution in an order-driven market isn’t guaranteed, unlike in a quote-driven market where market makers are committed to executing their quoted bid and ask prices. Quote-driven markets feature higher liquidity, owing to committed market makers, but might lack the transparency found in order-driven systems.
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Order-Driven Markets: Display bid and ask prices and quantity disclosures from both buyers and sellers, providing a transparent overview of market orders. This transparency sometimes results in lower liquidity levels when compared to quote-driven markets.
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Hybrid Markets: Such as the NYSE and Nasdaq, blend elements from both market types to balance liquidity and transparency, offering investors varied trading options aligned with their preferences.
Quote-driven markets and order-driven markets present distinctive paths for managing investments in securities. Comprehending their differences helps improve strategic trading decisions, catering to specific liquidity and transparency needs.
Related Terms: Order-Driven Market, Market Liquidity, Market Makers, Bid and Ask Prices, Hybrid Markets.
References
- Corporate Finance Institute. “Quote-Driven Market”.
