Order-Driven Market

An order-driven market is a type of market in which buyers and sellers initiate transactions by placing orders. Unlike a spot market, where prices are determined by the last traded price and quantity, in an order-driven market, prices are determined by the equilibrium of supply and demand.

Key Features of Order-Driven Markets:

1. Orders: All transactions are initiated by placing orders. Buyers specify the quantity and price they are willing to pay for the asset. Sellers specify the quantity and price they are willing to accept.

2. Matching: Orders are matched with each other in the order book. When a buyer’s order matches a seller’s order, the transaction is executed.

3. Equilibrium: Prices are determined by the equilibrium of supply and demand. The market price is the price at which the quantity of buyers and sellers are equal.

4. Continuous Trading: Order-driven markets typically have continuous trading, meaning that orders can be placed and filled at any time.

5. Centralized Exchange: Most order-driven markets are facilitated by a centralized exchange, which acts as an intermediary between buyers and sellers.

Examples of Order-Driven Markets:

• Equity markets
• Futures markets
• Foreign exchange markets
• Over-the-counter markets

Advantages:

• Transparency: All orders are visible in the order book, which increases transparency and price discovery.
• Price Stability: Orders can help to stabilize prices by providing a floor and ceiling.
• Liquidity: Order-driven markets can have high liquidity due to the large number of participants.

Disadvantages:

• Price Fluctuations: Despite their stability, prices in order-driven markets can fluctuate more than in spot markets.
• Market Impact: Large orders can have a significant impact on market prices.
• Order Book Manipulation: In some cases, market participants may manipulate the order book to influence prices.