In the equity section, ch. 36, it says one of the advantages for order-driven market is anonymity and low transaction costs. However, it also states that the market is illiquid. Later in the chapter, it says that illiquidity results in higher transaction costs. So which is it, we know that illiquidity is a disadvantage of auction markets but does it have lower or higher transaction costs than the price-driven market?
A price driven market should have lower costs. With a centralized market maker it should produce a tighter bid/ask spreads resulting in lower transaction costs.
that’s exactly what I thought. However, i think that for larger orders, the benefit of auction markets is the lower transaction costs because there are no bid-ask spread and therefore no market impact from the transaction.
It seems that the statement that illiquidity results in higher transaction costs is true for non-auction markets… even though illiquidity will always result in higher trx costs. So, are NASDAQ and NYSE order-driven? I thought all exchanges are order *and* price driven, i.e., order size and price determine trading.
Yea, that does sound right. Here’s my revised thinking: Let’s I am looking to place a very large order, say to purchase 100,000 shares of AAPL. In a price driven market if I immediately put the order out into the market at once (market order) I would get crushed on the purchase price because I would immediately drive up the price of the stock so that the last shares I bought would be at a much higher level than the first shares purchased. In an auction market I could just shop around to the dealers for the best quote for 100,000 shares and wouldn’t have to worry about the market;s bid-up impact. So it sounds like for smaller orders the price driven market is going to result in lower transaction costs, but as I increase the order size the auction market may become cheaper. Does that make sense??
NYSE is auction NASDAQ is price/quote driven
An auction market is done by collecting bids and asks before trading begins. When they ring the bell, orders are matched according to best prices. This happens everyday in all the exchanges, and also after halting. So, although you are placing a market order, you get the best execution for whatever quantity you have. Occasionally, there might be some imbalance and auction is held off for a while.
I think of it like this. Order books are on order driven markets. So market makers are involved. Price driven is NASDAQ.
Price = dealers/market makers Order = not
No agreement on what is order-driven and what is price-driven! Can someone define these two terms and give actual examples? I know well how the market works, but this terminology is not helpful.
Price driven markets such as NASDAQ are based around the concept of dealers who post their individual quotes for securities. These markets are characterized by high liquidity for large block trades, but are somewhat more expensive execution-cost-wise for smaller trades. The dealer offers a ‘free option’ by posting their price for securities. Order driven markets have a centralized order book, and do not rely on dealers. The buy and sell matching is done via this book. It’s known to have low transaction costs, but it’s a little harder to fill large block trades. Several major European exchanges use this system. The NYSE is listed as a hybrid system in the textbook. Hope this triggers your memories.
also, illiquidity adds the opportunity cost of missing a trade, which is a part of the cost considerred
whats the other index other than NASDAQ that is price driven as well ? i remembered reading somewhere that there are two of them
The London SEAQ system and the NASDAQ are price driven while Amex and NYSE are order driven