The term 'Securities Markets' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Securities Markets refer to either literal physical or virtual online places for traders and investors to buy and sell securities. These markets have been dramatically changing in the last several decades in order to best meet the requirements and wishes of investors and traders alike. Traders must have such markets which are easy to access, highly liquid, and that levy the most competitive transaction costs possible. These three core needs of traders have combined to create several different kinds of market structures around the globe. Among these are markets which are order driven, quote driven, hybrid, and brokered.
Many Securities Markets are order driven. With these markets, the sellers and buyers on the exchanges match directly up, typically using a computer system. The middle man is eliminated in such a market structure. This makes them the opposite of markets which are quote driven. Price discovery is accomplished thanks to the traders’ limit orders on every security. The majority of such order-based markets utilize an auction system. Naturally sellers will be seeking the highest possible price while buyers are on the hunt for the best possible bargain. When they match, execution of trades happens.
The two kinds of such markets are the continuous auction and the call auction markets. The greatest advantage to this style of market is the massive quantities of investors and traders who will offer to sell and buy a security. This means that prices are competitive and provides superior prices for all traders. It does have a downside. When a security has only a few members trading, then liquidity is often weak. The TSX Toronto Stock Exchange of Canada represents a market that is order driven.
Securities Markets which are quote driven are also referred to as dealer markets. In such market structures, the sellers and buyers have a transacting middle man in between them in the form of a dealer or market maker. It is up to the market makers to provide the ask and bid quotes on stocks for which they are willing to sell and purchase shares. These market makers have exclusivity in their market functions (many times) and receive special privileges. Among these are low to no exchange fees, specific order book and order flow information, and the unique ability to post the stock quotes. Such markets are most common with OTC over the counter markets like the NASDAQ and London’s SEAQ, the FOREX market, and the bond markets. Nowadays NASDAQ has become more of a hybrid type with elements of order-driven structures in place.
The greatest advantage to such quote-driven securities markets appears when stocks or markets are illiquid. Dealers are able to boost the traders’ liquidity with their intervention, as they often keep a security inventory on hand. They get to enjoy the spread between the bids and ask as a compensation for this accommodation.
Hybrid markets are also popular structures with many Securities Markets. They are sometimes called mixed markets. The NYSE New York Stock Exchange is a well-known example of this category. Naturally this system will utilize characteristics from the two order-driven and quote-driven arrangements. When they have low liquidity periods, these markets are able to fall back on the dealer-provided liquidity to improve transactions.
A final type of Securities Markets is the brokered markets. Brokers represent middle men who engage in discovering counterparties for any trade. As customers request of a broker to help them complete an order, the brokers will go through their extensive networks in an effort to locate an appropriately matching client. These types of markets are mainly for those securities which do not have a traditional public market. Illiquid and unique securities fall into this category. Where huge block trades of highly illiquid stocks or bonds are concerned, brokered markets are employed. Direct real estate is another classic example of such a brokered type of market. Real estate brokers are the ones who fill the service of matching up a unique seller and interested buyer in this case.