Order Driven Market vs. Quote Driven Market

Attribute	Order Driven Market	Quote Driven Market
Price determination	Based on orders placed by buyers and sellers	Based on quotes provided by market makers
Liquidity	Dependent on the number and size of orders in the market	Dependent on the willingness of market makers to provide quotes
Transparency	Offers transparency as all orders are visible in the order book	May lack transparency as quotes may not always reflect true market conditions
Market depth	Can provide information on the depth of the market through the order book	May not always provide information on the depth of the market

Introduction

Order driven market and quote driven market are two different types of trading systems that operate in financial markets. Each system has its own set of attributes and characteristics that make them unique. In this article, we will compare the attributes of order driven market and quote driven market to understand how they function and the impact they have on market participants.

Order Driven Market

In an order driven market, trading is driven by the orders placed by market participants. These orders are displayed on a central order book, which shows the buy and sell orders for a particular security. Market participants can see the depth of the market and the prices at which other participants are willing to buy or sell. The matching of buy and sell orders is done automatically by the system based on price and time priority.

One of the key attributes of an order driven market is transparency. Since all orders are displayed on the order book, market participants have access to real-time information about the supply and demand for a security. This transparency helps to ensure fair and efficient price discovery. Additionally, in an order driven market, market participants have the flexibility to choose the price at which they want to trade, which can lead to better price execution.

Another attribute of an order driven market is liquidity. With all orders displayed on the order book, there is a continuous flow of buy and sell orders, which helps to ensure that there is always a market for a security. This liquidity can help to reduce the impact of large trades on the market price, as there are typically enough orders in the market to absorb the trade.

However, one potential drawback of an order driven market is the possibility of order congestion. When there are a large number of orders in the market, it can be difficult for market participants to get their orders executed at their desired price. This can lead to delays in order execution and potentially higher trading costs.

In summary, an order driven market is characterized by transparency, liquidity, and price discovery. Market participants have access to real-time information about the supply and demand for a security, which can help to ensure fair and efficient trading. However, order congestion can be a potential drawback, as it can lead to delays in order execution.

Quote Driven Market

In a quote driven market, trading is driven by quotes provided by market makers or dealers. Market makers quote prices at which they are willing to buy and sell a security, and market participants can trade with the market maker at these quoted prices. Unlike an order driven market, there is no central order book in a quote driven market, and market participants do not have visibility into the depth of the market.

One of the key attributes of a quote driven market is market maker liquidity. Market makers provide continuous quotes for a security, which helps to ensure that there is always a market for the security. Market makers also play a crucial role in price discovery, as they are responsible for setting the bid and ask prices based on their assessment of market conditions.

Another attribute of a quote driven market is immediacy. Market participants can trade with the market maker at the quoted prices without having to wait for their orders to be matched with other orders in the market. This can help to ensure fast and efficient order execution, especially for smaller trades.

However, one potential drawback of a quote driven market is the lack of transparency. Since there is no central order book, market participants do not have visibility into the supply and demand for a security. This lack of transparency can make it difficult for market participants to assess the true market price of a security and can potentially lead to wider bid-ask spreads.

In summary, a quote driven market is characterized by market maker liquidity, immediacy, and price discovery. Market makers provide continuous quotes for a security, which helps to ensure that there is always a market for the security. However, the lack of transparency in a quote driven market can be a potential drawback, as market participants do not have visibility into the depth of the market.

Comparison

• Transparency: Order driven markets are known for their transparency, as all orders are displayed on a central order book. In contrast, quote driven markets lack transparency, as market participants do not have visibility into the depth of the market.
• Liquidity: Both order driven and quote driven markets provide liquidity, but in different ways. Order driven markets have continuous flow of buy and sell orders on the order book, while quote driven markets rely on market makers to provide liquidity through continuous quotes.
• Price Discovery: In an order driven market, price discovery is done through the matching of buy and sell orders on the order book. In a quote driven market, market makers play a key role in price discovery by setting the bid and ask prices based on market conditions.
• Immediacy: Quote driven markets offer immediacy, as market participants can trade with market makers at the quoted prices without delay. In contrast, order driven markets may experience delays in order execution during periods of order congestion.
• Market Impact: Order driven markets can help to reduce the impact of large trades on the market price, as there are typically enough orders in the market to absorb the trade. In a quote driven market, the market impact of a large trade may be more pronounced, as market makers may widen their spreads to manage their risk.

Conclusion

Order driven market and quote driven market are two different trading systems that operate in financial markets. Each system has its own set of attributes and characteristics that make them unique. An order driven market is characterized by transparency, liquidity, and price discovery, while a quote driven market is characterized by market maker liquidity, immediacy, and price discovery. Understanding the differences between these two systems can help market participants make informed decisions about how they want to trade in the market.