What Is a Quote-Driven Market?
Let me explain what a quote-driven market is. It's an electronic stock exchange system where prices come from bid and ask quotations provided by market makers, dealers, or specialists. In this setup, which you might also hear called a price-driven market, dealers handle orders by pulling from their own inventory or matching them with other orders. This is the opposite of an order-driven market, where you see individual investors' bid and ask prices along with the number of shares they're looking to trade.
Key Takeaways
When we talk about a quote-driven market, the trades are driven by the market makers rather than the investors themselves. Dealers and specialists fill orders from their inventory or match them with others. This differs from an order-driven market, which focuses on what individual investors want, including their bid and ask prices and share quantities. Dealers collaborate with banks and broker-dealers to offer quotes for various securities, and as an investor, you can trade at those quoted prices or negotiate with help from your agent. You'll often find quote-driven markets in bonds, currencies, and commodities, while stock markets are usually order-driven or a mix of both.
Understanding a Quote-Driven Market
You see quote-driven markets most in areas like bonds, currencies, and commodities. They're also known as dealers markets because all trades go through dealers. These dealers, partnering with investment banks, commercial banks, and broker-dealers, provide quotes for different instruments, and customers have to trade through them at the quoted prices. Some call them dealer- or price-driven markets. Traders can accept the dealers' quoted prices or negotiate better ones, either on their own or via a broker or agent. In a pure quote-driven market, all trades must go through dealers, though dealers can trade among themselves using inter-dealer brokers. Dealers supply all the liquidity here, and they might choose not to execute a trade for a specific client, often because they specialize in types like retail or institutional.
Fast Fact
Hybrid markets like the NYSE and Nasdaq combine aspects of both quote-driven and order-driven markets.
Order-Driven Markets vs. Quote-Driven Markets
In an order-driven market, order execution isn't guaranteed, but in a quote-driven market, it is, because market makers must meet the bid and ask prices they quote. A quote-driven market offers more liquidity than an order-driven one but lacks transparency. Hybrid markets blend both, and the NYSE and Nasdaq are examples. In an order-driven market, you see orders from both buyers and sellers, showing the prices they're willing to buy or sell at and the quantities involved. This makes order-driven markets transparent, displaying all market orders and prices, which quote-driven markets don't do. On the other hand, quote-driven markets are more liquid thanks to market makers, unlike order-driven ones.
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