What Is a Quote-Driven Market?
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.
Key Takeaways
- When a market is considered to be quote-driven, the trades are determined by those who make the markets, rather than the investors, with dealers and specialists who are looking to fill orders from their inventory or match them with other orders.
- This is different from an order-driven market, which is based around what individual investors are looking for—including their bid and ask prices and how many shares they want to trade.
- Dealers work with banks and broker/dealers to provide quotes for different securities, and investors can either trade through them at the quoted prices or try to negotiate, with the help of their agents.
- Markets for bonds, currencies, and commodities are often quote driven, while stock markets are typically either order-driven or a combination of both.
Understanding a Quote-Driven Market
Quote-driven markets are most commonly found in markets for bonds, currencies, and commodities. Quote-driven markets are also known as a dealers market because all trades are executed through dealers. The dealers, working with investment banks, commercial banks, and broker-dealers, provide quotes for different instruments and all customers need to trade through them at the quoted prices.
Some people may also refer to quote-driven markets as a dealer- or price-driven market. The following are some of the key points about the quote-driven market.Traders may either accept the prices quoted by the dealers or try to negotiate better prices either themselves or through their broker or agent. In a pure quote-driven market, all traders must trade through dealers; however, dealers may also trade among themselves through inter-dealer brokers. In a quote-driven market, dealers supply all the liquidity in the market.
Dealers may choose not to execute a trade for a specific client. This is often done because some dealers specialize in certain types of clients, such as retail or institutional.