Order driven market refers to the market situation where all buyers and sellers show the prices that they wish to buy or sell a specific security. These people usually also display the amount of that security they want to sell or buy.
This circumstance is in the opposite of a quote driven market. In the quote driven, there are only the bids and asks price from the market makers and specialists that are being displayed in the market.
The Details Explanation
This market situation consists of the constant flow of traders’ buy and sell orders. This market typically does not have any designated liquidity providers. But, it has typical orders, which are market orders and limit orders.
As a comparison, in a quote driven market, traders trade the security based on the bids and offers provided by the market makers providers.
The main advantage of the order-driven market is transparency. The transparency comes from the display of the entire order book accessible for the investors. Normally, in most exchanges, to access that information, traders need to pay a special fee.
But, this type of market does not own the same degree of liquidity. That is because the market makers, as well as the specialist, have to make transactions at their posted bid and ask prices.
Informed Trading Affect Order Driven Market
Being informed during this market situation can be helpful. Especially, when traders need to choose between market order (that needs liquidity) and limit order (that gives liquidity).
The higher shares transaction from informed traders results in improving liquidity on the market. However, these traders will not affect the price of their orders. Commonly, limit orders give smaller price impact than a market order.
The Ways Order-Driven Market Ranks Buy and Sell Orders
This market situation ranks the buy and sells orders based on the price. If there are remaining shares, then the trading system will match them with the next top-ranked sell or buy order.
The first rule for the arrangement is the price priority. But, if there orders at the same price, then, the earlier order will get prioritized.
