CFA Level IEquity InvestmentsHard
An equity trader compares two market structures. In Market A, designated dealers continuously post firm bid and ask prices at which they stand ready to trade, and investors transact directly against these quotes. In Market B, buy and sell orders from investors are collected and automatically matched against each other without a designated intermediary providing continuous quotes. Which statement correctly characterizes these two markets?
- ABoth markets are quote-driven, differing only in trading hours
- BBoth markets are order-driven, differing only in the number of dealers involved
- CMarket A is order-driven and Market B is quote-driven
- DMarket A is quote-driven and Market B is order-driven
Show answer & explanationAnswer & explanation
Correct answer: D. Market A is quote-driven and Market B is order-driven
Market A describes a quote-driven (dealer) market, where designated dealers provide liquidity by continuously quoting bid and ask prices. Market B describes an order-driven market, where trades result from matching investor orders directly (e.g., via an order book), without reliance on dealer quotes.
Why the other options are wrong
- A. Incorrect; the two markets differ fundamentally in mechanism (dealer quotes vs. order matching), not just hours.
- B. Incorrect; Market A explicitly relies on dealers providing quotes, which is not an order-driven feature.
- C. Incorrect; this reverses the definitions of the two market structures.
Quote-Driven vs Order-Driven Markets
Quote-driven (dealer) markets rely on designated dealers who continuously post bid/ask quotes and provide liquidity; order-driven (auction) markets match buy and sell orders directly from market participants, often via an electronic limit order book.
- Quote-driven: dealers as intermediaries, e.g., traditional OTC/dealer markets
- Order-driven: direct matching of investor orders, e.g., electronic limit order books
- Order-driven markets can further be call markets (periodic matching) or continuous markets
Memory trick: Dealers quote, orders match — know who moves the market.