What Is an Order Driven Market?

An order driven market is type of market situation in which investors work through some sort of central facility to place orders for purchases and sales of investments. Within this type of market situation, the individual prices of the investments traded in that market are influenced by the balance between the supply and the demand that is currently occurring within that market. Within this type of market situation, it is the buying and selling activity of the investors that drives what occurs within that market, rather than the recommendations of experts that are associated with the marketplace.

The function of an order driven market is different from that of a quote driven market. With the latter, the assessments and quotations that are developed by investment professionals such as dealers, brokers, and market makers will have a great deal of influence on the current trading price for any asset that is being offered in the marketplace. While demand and supply are still important in that data regarding buying and selling is often taken into account by those professionals, it is the quotes that ultimately set the prices that prevail.

In order to benefit from participation in an order driven market, it is important to understand what is happening with the supply and demand for certain securities as of the current date. In addition, assessing what type of changes in that supply and demand will occur over the next several weeks, months, or even years is also helpful in deciding what to buy, how long to hold onto those acquired assets, and when to sell them in order to maximize profits or to avoid incurring some sort of a loss. Investors will allow for any factor that could stimulate or decrease demand, such as changes in the economy, advancements in technology, or any other event that could either cause a glut of shares to be offered for sale or lead to a shortage of those available shares based on investors moving to buy those shares just before a projected increase.

Like any type of market driven situation, an order driven market does involve some risk for investors. That risk will vary from one security to the other, with relatively safe investments involving a low rate of volatility that is coupled with lower but generally consistent returns. There are also investments offered in an order driven market that carry greater risk, but also have the potential for higher returns, assuming that the demand for those securities remains high.