Quote-driven vs order-driven — which is better for execution?

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AcadiFi · Accepted Answer

In a quote-driven market, dealers post bid and ask prices at which they're willing to trade; customers trade against those quotes. In an order-driven market, trades match based on the limit order book with price-time priority — no dealer is required. Most equity markets are hybrid: an electronic order book provides continuous order-driven matching, and designated market makers add quotes to deepen liquidity. Example — order-driven: On Euronext's Cash Order Book for VeraDyne N.V., the best bid is €28.44 for 4,000 shares; the best ask is €28.46 for 2,800 shares. A new incoming market buy for 3,500 shares executes 2,800 at €28.46, then walks up the book. No dealer is involved. Example — quote-driven: A corporate bond like Alaberg Resources 5.625% 2032 trades by request-for-quote on MarketAxess: three dealers respond with 98.20/98.45, 98.15/98.50, 98.25/98.42. The customer lifts 98.42 for $2M face. Which is better for execution? Order-driven shines in liquid, standardized instruments where the natural order flow crosses tightly. Quote-driven shines where a particular security trades rarely and a dealer's inventory is required to find the other side. Analysts should study turnover/outstanding ratios to anticipate which model dominates.

Quote-driven vs order-driven — which is better for execution?

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