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Order Driven Market



Definition

An order driven market is a financial market where all buyers and sellers place orders that are then matched by price and other conditions. The priority is typically set by the system based on certain conditions like price, timing etc. This market structure is often considered transparent as the orders, prices, and quantities are visible to all participants.

Phonetic

/’ɔ:rdər ‘drɪvən ‘mɑ:rkɪt/

Key Takeaways

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  1. Transparency: One of the main features of an order-driven market is high level of transparency. This is because all buy and sell orders are visible to the participants. This allows investors to make informed decisions about the prices at which they are willing to buy or sell.
  2. Lack of Market Makers: Unlike quote-driven markets, order-driven markets do not rely on market makers to facilitate trading. Instead, buyers and sellers interact directly with each other, which can lead to greater efficiency in the pricing of securities.
  3. Priority Rules: In an order-driven market, orders are typically executed according to certain priority rules. These rules typically include price priority (orders with the best price are executed first) and time priority (among orders with the same price, the one received first is executed first).

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Importance

The term Order Driven Market holds significant importance in the field of business and finance as it provides an equitable and transparent approach to trading. In an order driven market, buyers and sellers trade directly with each other and the prices are determined by matching supply and demand. This market primarily operates on the basis of orders where all the buy and sell orders are openly displayed in the order book, which contributes to improved price transparency and market liquidity. Furthermore, this system reduces information asymmetry, as market participants have access to all orders in the market, making it harder for any participant to manipulate prices. Thus, the order driven market aids in enhancing market fairness and efficiency, which are fundamental to financial markets.

Explanation

An Order Driven Market serves the purpose of creating a transparent and equitable trading environment where all market participants have equal access to information about the availability of securities and their corresponding prices. Market orders, limit orders, and stop orders are all accepted, and trades are matched by a process that compares the buying and selling prices to execute trades. This process helps to ensure a fluidity of transactions, which enables consistent trading activity. Furthermore, it helps to create a competitive marketplace by encouraging buyers to offer the highest possible price and sellers to ask for the lowest price.This type of market structure is primarily used in stock exchange systems. Because of the inherent transparency and accessibility of information, it is often seen as a boon to smaller investors who can use these factors to their advantage when participating in trading activities. It can enable informed decision making and promote market efficiency. Additionally, by providing all market participants with equal information, it prevents larger players from potentially monopolizing the market and helps maintain fairness and balance within the marketplace.

Examples

1. New York Stock Exchange (NYSE): The NYSE operates as an order driven market, which allows for direct trade between buyers and sellers. It uses a system where buy and sell orders are entered into a single system that matches orders for execution.2. NASDAQ: NASDAQ (National Association of Securities Dealers Automated Quotations) is another example of an order driven market. Trade orders in NASDAQ are driven by investors who use systems to place market orders or limit orders, which are then matched in real time.3. Foreign Exchange Market (Forex): The Forex market provides an order-driven environment for currency trading. When a trader places an order, the system searches for the best matching opposing order to execute the trade.

Frequently Asked Questions(FAQ)

What is an Order Driven Market?

An Order Driven Market is a financial market where all orders of both buyers and sellers are displayed. Prices are determined by matching these orders, with priority given to the highest bid (for buyers) or the lowest offer (for sellers).

How does an Order Driven Market function?

In an Order Driven Market, all buy and sell orders are accumulated and processed from a centralized location or platform. Orders are executed when buy and sell orders match in terms of price and quantity.

What is the advantage of an Order Driven Market?

One of the main advantages of an Order Driven Market is the increased transparency. All participants can see the details of every order, promoting a fair and competitive market environment.

Can Order Driven Markets have disadvantages?

Yes, one of the main disadvantages can be the lack of liquidity, especially for less popular securities. This could lead to significant price fluctuation for certain assets.

What are some examples of Order Driven Markets?

Most stock exchanges, like the New York Stock Exchange (NYSE) and the National Stock Exchange of India (NSE), use order driven systems for their operations.

What is the difference between an Order Driven and Quote Driven Market?

In an Order Driven Market, prices are determined by order matching. In a Quote Driven Market, they are set by market makers.

Who can participate in an Order Driven Market?

An Order Driven Market is open to all market participants and the interaction of their buy and sell orders determines the price.

What else is an Order Driven Market referred to as?

An Order Driven Market can also be referred to as an auction market or a matching market.

What influences price in an Order Driven Market?

The price in an Order Driven Market is influenced by the supply and demand of the securities at a particular time.

Related Finance Terms

Sources for More Information


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