What is Order Driven Market?

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An order-driven market is a financial market where all buyers and sellers display the prices at which they wish to buy or sell a particular security, as well as the amounts of the security desired to be bought or sold. This kind of trading environment is the opposite of a quote-driven market, which only displays bids and asks of designated market makers and specialists for the specific security that is being traded.

Definition

An order-driven market is a financial market structure where all participants publicly display their buy and sell orders, including the trading price and quantity. This market allows traders to match orders directly without the need for market makers or specialists. It typically relies on electronic trading systems to automatically match buy and sell orders.

Origin

The concept of order-driven markets originated in the late 20th century, becoming popular with the advancement of electronic trading technology. One of the earliest order-driven markets was the SEAQ system of the London Stock Exchange, established in 1986. Since then, with technological advancements, order-driven markets have been widely adopted globally.

Categories and Features

Order-driven markets are mainly divided into two categories: fully order-driven markets and hybrid order-driven markets. Fully order-driven markets rely entirely on order books, while hybrid order-driven markets combine the functions of order books and market makers. Their main features include high transparency, low transaction costs, and high market efficiency.

Case Studies

A typical example is the NASDAQ market, which is a hybrid order-driven market combining electronic order books and market maker functions. Another example is the Toronto Stock Exchange, which is a fully order-driven market where all trades are conducted through electronic order books.

Common Issues

Common issues investors might face in order-driven markets include insufficient liquidity and high price volatility. To address these issues, investors can use limit orders to control trading prices and trade during periods of higher liquidity.

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