Quote driven and order driven financial markets

Question

I know that

• an order driven market is a financial market where all of the orders of both buyers and sellers are displayed, detailing the price at which they are willing to buy or sell a security and the amount of the security that they are willing to buy or sell at that price

• a quote driven market is one that only displays bids and asks of designated market makers and specialists for a specific security, and in which prices are determined from quotations made by market makers or dealers.

My questions are:

1. In a quote driven market, must every investor trade with a market maker? In other words, two parties that are both not market makers cannot trade between themselves directly?

2. Does a quote driven market only display the "best" bid and ask prices proposed by the market makers? In other words, only the highest bid price among all the market makers is displayed, and other lower bid prices by other market makers are not? Similarly, only the lowest ask price over all market makers is displayed, and other higher ask prices by other market makers are not?

3. In a order-driven market, is it meaningful to talk about "the current stock price", which is the price of last transaction?

   For a specific asset, will there be several transactions happened at the same time but with different prices?

4. Does an order driven market have market makers?

5. What are some examples of quote driven and order driven financial markets, in which investors are commonly trading stocks and derivatives, especially in U.S.?

Thanks!

Answer 1

- In a quote driven market, must every investor trade with a market maker? In other words, two parties that are both not market makers cannot trade between themselves directly?

In a way yes, all trades go through a market maker but those trades can be orders put in place by a "person" IE: you, or me.

- Does a quote driven market only display the "best" bid and ask prices proposed by the market makers? In other words, only the highest bid price among all the market makers is displayed, and other lower bid prices by other market makers are not? Similarly, only the lowest ask price over all market makers is displayed, and other higher ask prices by other market makers are not?

No, you can see other lower bid and higher ask prices.

- In a order-driven market, is it meaningful to talk about "the current stock price", which is the price of last transaction?

Well that's kind of an opinion. Information is information so it won't be bad to know it. Personally I would say the bid and ask price is more important. However in the real world these prices are changing constantly and quickly so realistically it is easier to keep track of the quote price and most likely the bid/ask spread is small and the quote will fall in between. The less liquid a security is the more important the bid/ask is. -- This goes for all market types.

- For a specific asset, will there be several transactions happened at the same time but with different prices?

Today with electronic markets, trades can happen so quickly it's difficult to say. In the US stock market trades happen one at a time but there is no set time limit between each trade. So within 1 second you can have a trade be $50 or $50.04. However it will only go to $50.04 when the lower ask prices have been exhausted.

- Does an order driven market have market makers?

By definition, no.

- What are some examples of quote driven and order driven financial markets, in which investors are commonly trading stocks and derivatives, especially in U.S.?

Quote driven market: Bond market, Forex.

Order driven market: NYSE comes from an order driven market but now would be better classified as a "hybird market"

Conclusion:

If you are asking in order to better understand today's stock markets then these old definitions of Quote market or Order market may not work. The big markets in the real world are neither. (IE: Nasdaq, NYSE...)

The NYSE and Nasdaq are better classified as a "hybird market" as they use more then a single tactic from both market types to insure market liquidity, and transparency. Markets these days are strongly electronic, fast, and fairly liquid in most cases.

Here are some resources to better understand these markets:

An Introduction To Securities Markets

The NYSE And Nasdaq: How They Work

Understanding Order Execution