What is: Quote Driven System

What is: Quote Driven System

A Quote Driven System is a type of trading system where market makers or dealers provide quotes for buying and selling securities. These quotes include the price at which the market maker is willing to buy or sell a security, as well as the quantity that they are willing to trade at that price. This system is commonly used in over-the-counter (OTC) markets, where trading is done directly between parties without the need for a centralized exchange.

In a Quote Driven System, market makers play a crucial role in providing liquidity to the market. They stand ready to buy or sell securities at the quoted prices, which helps ensure that there is always a market for the securities being traded. Market makers make money by profiting from the spread between the buying and selling prices they quote.

One of the key advantages of a Quote Driven System is that it allows for greater flexibility in trading. Traders can negotiate directly with market makers to get the best possible price for their trades, rather than being limited to the prices available on a centralized exchange. This can result in better execution prices for traders, especially for large or illiquid securities.

However, a Quote Driven System also has its drawbacks. Since quotes are provided by market makers, there is a risk of price manipulation or market abuse. Market makers may quote prices that are not reflective of the true market value of a security, which can lead to inefficiencies in the market and potential losses for traders.

Overall, a Quote Driven System offers a decentralized approach to trading that can provide benefits in terms of flexibility and liquidity. However, traders should be aware of the risks associated with relying on quotes provided by market makers and take steps to mitigate these risks in their trading strategies.