An order-driven market is a financial market in which all buyers and sellers display the prices at which they wish to buy or sell a specific security, as well as the amounts of the security they wish to buy or sell.
This type of trading environment is the opposite of a quote-driven market. In addition, it only displays bids and requests for the specific security which trades from designated market makers and specialists.
Basically, the order-driven market consists of a constant flow of market participants buying and selling orders. There are no approved suppliers of liquidity. And then, the two main forms of orders are market orders and order limits. By contrast, approved market makers give bids and offers in a quota-driven market in which other market participants can trade.
Here are how order driven markets trade and drive its affects and environments rank.
1. How Informed Trading Affects Order Driven Markets
In order-driven environments, where traders can choose between market orders requiring liquidity, and limit orders providing liquidity, informed trading activities can actually give liquidity boost.
A higher share of active traders increases liquidity as proxied by the bid-ask spread and market resiliency. However, knowledgeable traders have no effect on the price impact of orders. Therefore, limit orders have a lower price effect by a factor of about four compared with business orders.
2. How Order Driven Environments Rank Buy and Sell Orders
Order-driven trading systems rate buying and selling orders according to size, at the minimum order sum matching the highest-ranking orders (if possible). If there is a remaining amount of shares to be purchased or sold in a given order, trading systems must align the order with the next highest order of sale or purchase.
Price priority is the first rule in the order preceding hierarchy. It was preceded by secondary precedence rules. It specifies on how to rank orders of the same size. The first order to arrive at the best price usually takes precedence over other orders. But, often trading systems exchange shown quantities of the same quality before secret quantities.
