Quote-Driven and Order-Driven Markets in FX and OTC Trading

Article Quant Q&A · Author: Mining

Summary

This explanation distinguishes quote-driven from order-driven trading by who can provide liquidity and how trading interest is expressed. In the FX examples, a quote-driven pool typically restricts submissions to approved liquidity providers, who quote a best bid and offer. An order-driven pool lets participants submit multiple orders at different prices and quantities, making those orders available to provide liquidity.

The distinction can affect market access and execution: quote submission may use a different interface or protocol, and liquidity providers may have last look, while participants in order-driven pools do not. The same electronic communication network can operate both pool types and may match incoming interest across them in a sequence shaped by the liquidity taker’s preferences. Names for these arrangements vary across venues, so terminology and venue rules matter. The answer also notes that many fixed-income and other over-the-counter markets use request-for-quote workflows, where dealers respond to a taker and there is no order book. It does not explain how to identify the source of a displayed security price.

Key ideas

In FX, quote-driven pools typically let approved liquidity providers submit bid and offer quotes.
Order-driven pools allow participants to submit orders with differing prices and quantities.
Quote-driven and order-driven pools may use different submission protocols and have different last-look rules.
A single electronic venue may operate both types of pools and sequence matches across them.
Many fixed-income and OTC markets use request-for-quote trading without an order book.

Tags

Forex Fixed income Market microstructure

Full text

# Exchange vs Order-Driven vs Quote -Driven

I have never understood the implications of a quote or order-driven market.

When I look up securities on google in a way to see their prices, is that price the price of the exchange? the price of a quote driven market? the price of an order-driven market? Do quote- or order-driven market determine the price in the exchange? what is the relationship between them?

## Answer by databento (score 3, accepted)

https://quant.stackexchange.com/a/70247

Some terminology, including terms like "quotes" and "orders", has become obsolete in the modern equity or futures markets.

However, "quote-driven" or "order-driven" still have a clear distinction in FX markets, where the former typically refers to a pool where only approved liquidity providers may submit a best bid and offer that they're willing to quote, and the latter typically refers to a pool where any participant may submit any number of orders with different price and quantity and provide liquidity as such.

Usually, a different "maker" API or wire protocol is required to submit quotes and a liquidity provider in a "quote-driven" FX market will usually have the option to exercise last look on their quotes, while participants in an order-driven market will not. This can be further confusing as the same ECN may operate both a quote-driven pool and an order-driven pool, and even depending on the liquidity taker's preference, match incoming orders against contra-liquidity on both pools in a particular sequence. This is also confusing because different ECNs have different marketing terms for each pool, e.g. order-cross-order ("OXO") or order-cross-price ("OXP").

Many fixed income or OTC markets are also "quote-driven", e.g. a liquidity taker may submit a "request for quote" (RFQ) which broker-dealers respond to, and there is no order book structure.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.