Quote-driven, Order-driven, and Brokered Markets

Quote-driven, Order-driven, and Brokered Markets

Quote-Driven Markets/Over-the-Counter (OTC) Markets

In quote-driven markets, customers trade at prices quoted by dealers that generally work for commercial banks, investment banks, broker-dealers, or trading houses. Most trades in these markets are conducted through proprietary computer communications networks or by phone.

Order-Driven Markets

Order-driven markets arrange trades using rules to match buy orders to sell orders submitted by customers or dealers. Almost all exchanges use order-driven trading systems, and every automated trading system is an order-driven system. Two sets of rules characterize order-driven market mechanisms: order matching rules, which match buy and sell orders, and trade pricing rules, which determine the price of the matched trades.

Order Matching Rules

Order-driven trading systems rank buy and sell orders by price (often along with secondary criteria), matching the highest-ranking orders (if possible) at the minimum order amount. If there is a remaining size in a buy (sell) order, the trading system will match it with the sell (buy) order that is next in the rankings. The first rule in the order precedence hierarchy is price priority, followed by secondary precedence rules, which determine how to rank orders of the same price. The first order to arrive at the best price usually has priority over other orders, though sometimes trading systems trade displayed quantities before hidden quantities of the same price.

Trade Pricing Rules

Call markets commonly use the uniform pricing rule, in which all trades execute at the same price, and the market chooses the price that maximizes the quantity traded. Continuous trading markets use the discriminatory pricing rule, which determines the price base on the limit price of the first order or quote (the standing order). Crossing networks, trading systems matching buyers and sellers willing to trade at prices obtained from other markets, use the derivative pricing rule: usually the midpoint of the best bid and ask quotes for the underlying asset.

Brokered Market

Brokers arrange trades among their clients for unique instruments with limited liquidity as such instruments would not generate enough orders in order-driven markets. Trades in this market usually take place between a small number of people or institutions.

Question

What market would an art collector use to sell a number of valuable paintings?

  1. Brokered market.
  2. Order-driven market.
  3. Quote-driven market.

Solution

The correct answer is A.

In a brokered market, intermediaries (brokers) help match buyers and sellers, which is common for unique, high-value, or illiquid assets such as art. Art collectors typically rely on brokers or auction houses to sell valuable paintings, as these assets are not standardized and require expertise to find suitable buyers.

B is incorrect. An order-driven market is where buyers and sellers submit orders directly to a centralized exchange (e.g., stock exchanges), and the market is driven by these orders. This is more suitable for standardized, liquid securities like stocks, not unique assets like art.

C is incorrect. In a quote-driven market, market makers (dealers) provide liquidity by quoting buy and sell prices for specific securities (e.g., bonds, certain stocks). This setup is also not ideal for selling unique assets like paintings, as they require more personalized negotiation and expertise, which brokers provide.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.