LOS b: Differentiate between an order-driven market and a price-driven market, and explain the risks and advantages of each.

Q1. Which of the following is NOT a characteristic of an order-driven market?

A)   Automated price quotations by market makers.

B)   Centralized order book to match orders.

C)   Liquidity is provided at the lowest cost.

Q2. Which of the following American stock exchanges is a combination of order-driven and price-driven system?

A)   New York Stock Exchange (NYSE).

B)   Chicago Board of Trade.

C)   NASDAQ National Market System.

Q3. One of the major benefits to investors who execute trades through an order-driven system is:

A)   best price execution.

B)   liquidity at the lowest cost.

C)   market makers who stand ready to buy and sell at listed prices.

LOS b: Differentiate between an order-driven market and a price-driven market, and explain the risks and advantages of each. fficeffice" />

Q1. Which of the following is NOT a characteristic of an order-driven market?

A)   Automated price quotations by market makers.

B)   Centralized order book to match orders.

C)   Liquidity is provided at the lowest cost.

Correct answer is A)

Posting price quotations by market makers is a characteristic of a price-driven market. Order-driven markets do not have market makers. Instead, the auction market matches the supply and demand for securities directly.

Q2. Which of the following American stock exchanges is a combination of order-driven and price-driven system?

A)   ffice:smarttags" />New York Stock Exchange (NYSE).

B)   Chicago Board of Trade.

C)   NASDAQ National Market System.

Correct answer is A)

The NYSE is a combination of an order-driven and price-driven system. The NASDAQ National Market System and NASDAQ Small Capitalization Market are price-driven markets. The Chicago Board of Trade is an options exchange using a price-driven system that involves open outcries of prices from market participants.

Q3. One of the major benefits to investors who execute trades through an order-driven system is:

A)   best price execution.

B)   liquidity at the lowest cost.

C)   market makers who stand ready to buy and sell at listed prices.

Correct answer is B)

Order-driven systems offer advantages such as views of all standing orders that can be quickly executed via the central ordering system allowing traders to monitor liquidity. This provides for order executions at the lowest cost as compared to price-driven systems. Both remaining benefits relate to price-driven systems.