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Reviewed by Jul 30, 2021| Updated on
An order-driven market is where buyers and sellers can place orders for securities they wish to purchase or sell. The price and number of securities needed to be bought or sold are specified in the order. The market price is determined by the buy or sell orders received. Orders once received at a centralised location are then matched and executed.
There are two types of orders, market orders and limit orders, under an order-driven market. Market orders are executed at the best possible price in the market. However, there is no guarantee of its execution nor the price. Limit orders set a maximum purchase limit or a minimum sell limit. Orders can be executed only lower, not higher than the purchase limit, and not lower than the sell limit.
Order driven markets are transparent. They work with the flow of buy and sell orders from the market participants. The order book is displayed for investors who would like to access the information. This is a database maintained by the exchange which lists the buyers and sellers and their bid prices. This information is, most often, charged by the exchange.
An order-driven market will not be as liquid as a quote driven market. This is because trading takes place only at the posted bid prices. Orders can also be executed only during market hours. Any order placed outside market hours will be executed once the market opens.
Order driven markets rank orders based on price. The highest-ranked order will be matched at the minimum possible price. In simple words, the lowest sell order and the highest buy order is matched, or if they exceed each other.
Order driven markets are more transparent than quote driven markets. The order book is available for those investors who would like to access the information on orders placed. Quote driven markets only display the bids, and requests for offers to be made.
Order driven markets are less liquid, as the orders are executed at their bid prices. Quote driven markets are more liquid as they guarantee order fulfilment, due to offers being requested, and market makers needing to meet their quoted ask prices.
Order driven markets are more suitable for stocks, options, etc. to be traded, while quote driven markets are better suited for commodities, bonds and currencies.