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Quote-Driven Market

Contents

  1. Unveiling the Essence of Quote-Driven Markets
  2. The Mechanics Behind Quote-Driven Markets
  3. Contrasting Quote-Driven and Order-Driven Markets

Deciphering Quote-Driven Markets: Exploring Market Dynamics

In the intricate world of financial markets, different trading systems govern how prices are determined and trades are executed. One such system is the quote-driven market, where prices are derived from bid and ask quotations provided by market makers, dealers, or specialists. Let's delve into the nuances of quote-driven markets, their characteristics, and how they differ from order-driven markets.

Unveiling the Essence of Quote-Driven Markets

Quote-driven markets, also known as dealer or price-driven markets, primarily operate in the realms of bonds, currencies, and commodities. Unlike order-driven markets, where individual investors dictate trade parameters, quote-driven markets rely on dealers who offer prices for various financial instruments. Traders have the option to accept quoted prices or negotiate for better terms, with dealers serving as the primary liquidity providers.

The Mechanics Behind Quote-Driven Markets

In quote-driven markets, dealers play a pivotal role in facilitating trades, working closely with investment banks, commercial banks, and broker-dealers to provide quotes for different securities. Traders must navigate through dealers to execute trades, either accepting quoted prices or attempting to negotiate more favorable terms. Liquidity in quote-driven markets predominantly stems from the actions of dealers, who may choose to execute trades based on their specialization and client base.

Contrasting Quote-Driven and Order-Driven Markets

Quote-driven markets offer guaranteed order execution, ensuring that market makers meet the bid and ask prices they quote. While quote-driven markets boast higher liquidity, they often lack transparency compared to order-driven markets. In an order-driven market, buyers and sellers openly display their orders, providing transparency regarding buy and sell prices and quantities. Hybrid markets like the NYSE and Nasdaq blend elements of both quote-driven and order-driven systems, offering a unique trading environment.