2013

Top Stories: International

Know Your Basics: Order Driven Market Quote Driven Market

Know Your Basics:

FIN-O-PEDIA
Lets Talk FINANCE!!

A SIMSREE Finance Forum Initiative | Issue 51

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH & ENTREPRENEURSHIP EDUCATION

Know Your Basics:

In this issue of Fin-O-Pedia, we are going to discuss what are Order Driven Market and Quote Driven Market. Further we will see the difference between the two to get more understanding of these terms.

Order Driven Market:

Definition: The financial market where all sellers and buyers display the amounts of security they wish to buy or sell as well as the prices at which they wish to buy or sell a particular security. What exactly is an Order Driven Market? In this type of market, all of the orders of buyers and sellers are displayed. It displays the price of the securities the buyer or seller is willing to buy or sell at respectively. It also displays the amount of securities the buyer or seller is willing to buy or sell at the quoted price. For example, if you buy 200 shares of XYZ Company, this order will be displayed and will be visible to all the people who have access to this information. The biggest advantage of this market is its transparency, since the entire order book is displayed for investors who wish to access this information. Most exchanges charge fees for such information. But the drawback of this market is that there is no guarantee of order execution. NSE trading mechanism operates on the principles of order driven system. A sample display in an order driven market is as shown in the next picture.

In the adjacent table, all of the buy and sell orders are displayed showing the price and share amount of the order. This is the peculiarity of the order driven market. Now, according to what we see in the table, someone could come into the market and buy 59,100 shares for Rs.42.65.

Quote Driven Market:

Definition: An electronic stock exchange system in which prices are determined from bid and ask quotations made by market makers, dealers or specialist is a Quote Driven Market. What exactly is a Quote Driven Market? As opposed to Order Driven Market, this market only displays bids and asks of designated market makers and specialists for a specific security. A market maker can be defined as a broker-dealer firm which accepts the risk of holding a certain number of shares of a security in order to facilitate trading in that security. This market only displays the bid and the ask offers of designated market makers, dealers or specialists. In other words, this market displays the offered price of the securities by a market maker. It will not display the order placed by you. The bid will change as the demand and supply of the security changes. Continuing above example, if you buy 200 shares of XYZ Company, it will not be displayed in the Quote Driven Market. Suppose there is one market maker for this stock, it would post its bid - say, Rs.50.50 - and its ask - say, Rs.51.50. This would be all the information which will be displayed. Now, you can buy the shares of XYZ Company at Rs.51.50 and sell it at Rs.50.50. 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. NYSE and NASDAQ are both considered as hybrid markets. A hybrid market combines the features of both of these markets.

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Difference between Order Driven Market and Quote Driven Market:

In this section, we will discuss major differences between Order Driven Market and Quote Driven Market in detail, so that we will have more understanding of these two markets. What is displayed The basic difference between the two markets is what is displayed in the market as far as orders and bid and ask prices are concerned. The order driven market displays all of the bids and asks, whereas the quote driven market focuses on the bids and asks of market makers. Guarantee of execution In an order driven market, there is no guarantee of order execution. In oppose to that, in a quote driven market, there is guarantee of order of execution. Transparency An order driven market is transparent in the sense that it clearly shows all of the market orders and what price people are willing to buy at or sell a particular security. But this is not the case with quote driven market. In quote driven market only displays the bid and the ask offers of designated market makers, dealers or specialists. Liquidity There is presence of market makers in a quote driven market. This leads to more liquidity of this market as compared to the order driven market.

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