A quote-driven market defines as an electronic stock exchange system. Within the system, the prices are coming from bid and ask quotations from market makers, specialists, or dealers.
Some people call a quote-driven market as a price-driven market. In this market, dealers match their own orders with the other orders. This market is the opposite of the order-driven market, which shows the bid and ask prices from the investors, as well as, the number of shares they want to trade.
The Definition
Investors mostly find this type of market in the bonds, currencies, and commodities market. This market is also known as the dealers market. The name comes from the trades execution process which always requires dealers.
The dealers alongside the investment banks, commercial banks, and broker-dealers give quotes for various instruments through the quoted price.
Things to Consider within this type of Market
There are several key points about the quote-driven market. First, investors can accept the prices from the dealers or negotiate a better price. In negotiating the price, they can do it by themselves or through their broker and agent.
Besides, we also have a pure quote driven market that requires traders to trade only through dealers. Or else, the dealers can also execute trades among themselves through inter-dealer brokers.
All the liquidity in this market is supplied by dealers supply. Dealers also have the option not to execute the trade. They usually do that since they only specialize in certain types of clients.
Order-Driven or Quote-Driven Markets
In the order-driven, there is a guarantee for the order execution. But, in the quote driven, there is no such guarantee since the market makers have to meet the bid and ask the price they quote, previously.
Besides, quote-driven is more liquid than the order-driven. Yet, the quote driven lacks in term of transparency.
