PostHeaderIcon Understanding The Types Of Securities Markets

The securities market has undergone several changes over the years as the needs of traders and investors also change. In fact, the securities markets constantly evolve in order to keep in track with the traders needs. That is why certain securities market structures have been developed and modified in order to address the traders need for a more transparent, liquid, and efficient securities market along with keeping up with the changes in the global economic setting. Here are some of the current securities markets that prevail.

Order Driven Securities Market

This major market structure is a type of securities market that works by matching buyers and sellers with each other. The advantage of this type of market is that there is no longer a need for a middleman to stand in between the buyer and seller of securities. Most order-driven markets are based on an auction process where buyers are looking to trade at the lowest price while sellers are looking out for the highest possible price.

There are basically two types of order driven markets- the call auction market and the continuous auction market. In the call auction market, orders are collected during the trading day conducts an auction at a specified time in order to determine the price. A continuous auction market on the other hand works continuously during trading hours and trades are being made every time buy and sell orders match.

One main benefit of the order driven markets is that it can be quite a liquid market when there are large numbers of traders buying and selling securities. Such instances bring about a more competitive market which relatively leads to better prices for the traders. But one disadvantage of such a market may be when there are relatively few traders who are engaging the market. Few traders and the liquidity in such a market become very poor. A typical example of an order driven market is the Toronto Stock Exchange.

Quote Driven Securities Market

A quote driven market is a market structure where transactions between buyers and sellers of securities are handled by dealers or market makers. The market makers are responsible for posting bid and ask quotes for certain securities that they are willing to buy, and then sell to traders. Such markets are common in over-the-counter markets such as Forex markets, bond markets and some equity markets like the NASDAQ and the London SEAQ, although the former also has certain market structure aspects similar to that of an order driven market.

This type of market structure is advantageous for markets that usually have low volume of trades. The use of a market maker or dealer in this case can help improve the liquidity of securities traded by maintaining an updated inventory of the security being traded.

Hybrid Market

There are market structures that also combine the best features of both an order driven and a quote driven market. The hybrid market or mixed market structure is usually dominated by an order driven market where buyers and sellers are being matched. But it also requires the use of dealers in cases where liquidity for certain securities is required. The New York Stock Exchange is an example of a hybrid market.


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