Continuous Quotation System - Explained
What is a Continuous Quotation System?
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Table of ContentsWhat is a Continuous Quotation System?How Does a Continuous Quotation System Work?Trading Mechanisms: Quote DrivenTrading Mechanisms: Order DrivenDisadvantages of the Order Driven marketTrading Mechanisms: Order TypesTrading Mechanisms: Order TimingAcademic Research on Continuous Quotation System
What is a Continuous Quotation System?
A continuous quotation system is defined as a securities trading system which when orders are placed, creates room for transactions and market makers. Securities are investment instruments that provide evidence of debt or equity other than the insurance policy or fixed annuities issued by a company, the government or other entities. Market makers are brokerage or financial institutions that maintain an offer to the firm and request prices at a certain location, prepared to buy or sell at publicly quoted rates (called market making). Individual shares liquidity which can be used for a majority of exchanges globally is provided by this system.
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How Does a Continuous Quotation System Work?
Irrespective of the market type, the detailed organization and implementation behind assets and securities trading can be referred to as trading mechanisms. The various market types could range from exchanges or dealers to OTC markets. The process of connecting buyers and sellers of an asset are all part of the mechanism. Although there are several types of trading mechanisms, there are two primary types of trading mechanisms namely:
- Order driven markets
- Quote driven markets
The device or database behind a trading process powered through an order book is the order book. This book lists all purchasers and sellers and their expected offers and demands.
Trading Mechanisms: Quote Driven
Continuous prices which have been provided by the market makers are always given to buyers and sellers that have been connected in a quote driven market. This implies that OTC or dealer markets will be the most suited for this mechanism type. The price provided by the market makers is the price a dealer is willing to sell in the buyers perspective while the given price is the amount the dealer is buying from the sellers perspective. All things being equal, the selling price will be higher than the specified buying price. The amount of profit made by the market maker and the dealer is known as the spread.
Trading Mechanisms: Order Driven
Buyers and sellers of assets will order products that they want to buy or sell in an order-driven market. The orders placed are immediately executed at the best price which is available once the assets have been listed at market price. If this method doesn't want to be used, a fixed or limit price can be indicated so that a limit or stop order can be initiated, making sure certain conditions have been met before the market order is executed. Order driven trading mechanisms are best to be used for exchanges because in respect to the listed price, there is an unavailability of counterparties; and the orders will be executed immediately a buyer or seller finds a counterparty.
Disadvantages of the Order Driven market
It can be seen from the definition of the order-driven market mechanism that there will be lower liquidity in this mechanism style as compared to the quote driven market. In as much as the dealer is willing to accept the slightly raised premiums of a quoted price, the market maker will always be present to buy or sell in a quote driven market. When buyers are not ready to accept prices listed by sellers in an order-driven market, trade can stop abruptly, meanwhile, the unwillingness of buyers to accept quoted prices in a quote driven market doesn't affect trade. Assets such as options, bonds etc which are naturally liquid and traded frequently are the best suited for order-driven markets because of its automated matching system.
Trading Mechanisms: Order Types
There are a majority of order types which can be taken advantage of by a trader when operating in an order-driven market. Trade orders refer to various types of orders placed on exchange for financial assets, for instance stocks or futures contracts. The order-driven trading style matches the order requirements for buyers and sellers. That is, a buyer with a purchase price that corresponds to a seller's sales price corresponds to an executed transaction. The various types of trade orders allow traders to make their trade more flexible and unique. These are the most common forms of trade orders:
- Market order
- Limit order
- Stop-loss order
Trading Mechanisms: Order Timing
The timing of a trade order (Trade order timing) allows customers to determine the time that a trade order is suitable for. For instance, orders may remain forever until they are executed, only last a day, or last for a certain duration. The various types of time frames of the trade order have various advantages and disadvantages, alongside the various strategies that an investor may have or wish to use. The most common forms of trade order timing according to the time order in which they will execute are as follows:
- Market Order (Immediate)
- Fill or Kill
- Good Today (otherwise referred to as Good Until Close of Day Order)
- Good Until Specified Time or Date
- Good Until Cancelled (GTC)