What is Quote-Driven Market?

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A quote-driven market is an electronic stock exchange system in which prices are determined from bid and ask quotations made by market makers, dealers, or specialists. In a quote-driven market, also known as a price-driven market, dealers fill orders from their own inventory or by matching them with other orders. A quote-driven market is the opposite of an order-driven market, which displays individual investors' bid and ask prices and the number of shares they want to trade.

Definition

A quote-driven market is an electronic stock trading system where prices are determined by buy and sell quotes provided by market makers, brokers, or specialists. In this market, brokers fill orders using their own inventory or match them with other orders. It is also known as a price-driven market.

Origin

The concept of a quote-driven market originated from traditional floor trading markets. With the development of electronic trading, this model evolved into modern electronic trading systems. By the late 20th century, quote-driven markets were widely adopted globally due to technological advancements.

Categories and Features

Quote-driven markets are mainly divided into two categories: market maker markets and broker markets. Market maker markets provide liquidity through market makers who hold stock inventories to meet buy and sell demands. Broker markets rely on brokers to match buy and sell orders. The main features of quote-driven markets include high liquidity and fast trading speed, but they may involve higher transaction costs.

Case Studies

A typical example is the NASDAQ market, a well-known quote-driven market where multiple market makers provide buy and sell quotes for stocks. Another example is the AIM market of the London Stock Exchange, which also uses a quote-driven model, allowing small companies to trade stocks through market makers.

Common Issues

Investors in quote-driven markets may encounter issues such as price discrepancies due to differences in market maker quotes, and potentially higher transaction costs. A common misconception is that quote-driven markets are always more efficient than order-driven markets, but this depends on the specific market conditions.

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