fin o pedia issue51 jan13 jan19

7/27/2019 Fin O Pedia Issue51 Jan13 Jan19

http://slidepdf.com/reader/full/fin-o-pedia-issue51-jan13-jan19 1/4

Top Stories: International

Know Your Basics:

A SIMSREE Finance Forum Initiative | Issue 51

FIN-O-PEDIA

et’s Talk FINANCE!!

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH &

ENTREPRENEURSHIP EDUCATION

2013

Know Your Basics:

Order Driven Market

Quote Driven Market



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.



3 | P a g e

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.



4 | P a g e

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.

fin o pedia issue51 jan13 jan19

Documents