Types of Markets

Market provides: liquidity, transparency and assurity of completion.

Liquidity: small bid-ask spread, large depth (trading in large volume without affecting the price), resilient (price recovers to intrinsic value easily)

High liquidity market increases the wealth of all participants (e.g. less liquidity risk premium)

Transparency: can access quotes and completed trade information easily

Quote-driven Markets

-       Dealers

(market makers) post prices

-       E.g. NASDAQ (but traders also post prices)

-       Dealers earn bid-ask spread

-       Dealers provide immediacy (bridging lowest ask and highest bid) as they are willing to have some inventory of stocks

Order-driven Markets

-       Traders trade with traders

-       Less liquid

-       1. Electronic crossing network: no price discovery

-       2. Auction market

-       3. Automatic Auction Markets

Brokered Markets

-       Brokers represent traders

-       Where public capitals are not well-defined

Hybrid Markets: NYSE

1. It has Quote-driven and Order-driven
2. Opening uses batch auction
3. Whole day uses continuous auction

Dealer: opposite to traders

Broker: represents traders