Quote driven and order driven financial markets
"- In a quote driven market, must every investor trade with a market        maker? In other words, two parties that are both not market makers        cannot trade between themselves directly? In a way yes, all trades go through a market maker but those trades can be orders put in place by a ""person"" IE: you, or me. - Does a quote driven market only display the ""best"" bid and ask        prices proposed by the market makers? In other words, only the        highest bid price among all the market makers is displayed, and        other lower bid prices by other market makers are not? Similarly,        only the lowest ask price over all market makers is displayed, and        other higher ask prices by other market makers are not? No, you can see other lower bid and higher ask prices. - In a order-driven market, is it meaningful to talk about ""the current stock price"", which is the price of last transaction? Well that's kind of an opinion. Information is information so it won't be bad to know it. Personally I would say the bid and ask price is more important. However in the real world these prices are changing constantly and quickly so realistically it is easier to keep track of the quote price and most likely the bid/ask spread is small and the quote will fall in between. The less liquid a security is the more important the bid/ask is. -- This goes for all market types. - For a specific asset, will there be several transactions happened at    the same time but with different prices? Today with electronic markets, trades can happen so quickly it's difficult to say. In the US stock market trades happen one at a time but there is no set time limit between each trade. So within 1 second you can have a trade be $50 or $50.04. However it will only go to $50.04 when the lower ask prices have been exhausted.   - Does an order driven market have market makers?  By definition, no. - What are some examples of quote driven and order driven financial markets, in which investors are commonly trading stocks and derivatives, especially in U.S.? Quote driven market: Bond market, Forex. Order driven market: NYSE comes from an order driven market but now would be better classified as a ""hybird market"" Conclusion: If you are asking in order to better understand today's stock markets then these old definitions of Quote market or Order market may not work. The big markets in the real world are neither. (IE: Nasdaq, NYSE...) The NYSE and Nasdaq are better classified as a ""hybird market"" as they use more then a single tactic from both market types to insure market liquidity, and transparency. Markets these days are strongly electronic, fast, and fairly liquid in most cases. Here are some resources to better understand these markets: An Introduction To Securities Markets The NYSE And Nasdaq: How They Work Understanding Order Execution"
"I'm loving this thread, by the way.  The answer to your question is yes: the PDE method and the martingale method lead to the same result.  I think this is intuitive, since they address the same things (drift, probability, etc).  Heath &amp; Schweizer (2000) have a nice paper in the Journal of Applied Probability that shows the (fairly general) circumstances under which the two methods will always have the same result.  It's titled ""Martingales versus PDEs in Finance: An Equivalence Result with Examples"".  My argument is that Black-Scholes is really an equilibrium model, not an arbitrage-free model.  Despite that, I'm claiming that it is possible to use BS (and any other equilibrium model) in a no-arbitrage manner by incorporating information from other securities, but that this doesn't make the underlying model and its assumptions a no-arbitrage model.  I think, basically, what I'm trying to say is that I don't think market completeness is really the issue, but rather that the issue is the difference between the model and reality.  Equilibrium models make a statement about what reality *should* be, given some parameters that you're supposed to know with certainty (all bets are off if you have to estimate them).  Arbitrage-free models explicitly use external, observed prices, *but do not explain why we observe those prices*.  In this context (and using these definitions), I'd say Black-Scholes is clearly an equilibrium model, albeit one built from some arguments that involve arbitrage." "As an exercise, I want to give this a shot.  I'm not involved in a firm that cares about liquidity so all this stuff is outside my purview.  As I understand it, it goes something like this: buy side fund puts an order to the market as a whole (all or most possibly exchanges).  HFTs see that order hit the first exchange but have connectivity to exchanges further down the pipe that is faster than the buy side fund.  They immediately send their own order in, which reaches exchanges and executes before the buy side fund's order can.  They immediately put up an ask, and buy side fund's order hits that ask and is filled (I guess I'm assuming the order was a market order from the beginning).  This is in effect the HFT front running the buy side fund.    Is this accurate?  Even if true, whether I have a genuine issue with this... I'm not sure.  Has anyone on the ""pro-HFT"" side written a solid rebuttal to Lewis and Katsuyama that has solid research behind it?" Assuming that blocks, dark liquidity, and auctions aren't available, one of the biggest things that equity traders also have going for them is the availability of different execution venues, as well as the aforementioned ability to strategically time execution/child order placement based on the state of the order book at any given time.  A security with a NYSE primary listing (BAC or IBM for example) will be traded on several exchanges/ECNs - Nasdaq, NYSE Arca, the various Bats exchanges - and that in itself opens up a lot of opportunity to spread out an order.  As an alternative to simply going through several price levels on a single exchange, you can also route out multiple orders simultaneously to different exchanges to scoop up liquidity.  All of that being said, I think it should be noted that you really can't exclude the execution methods that you mentioned in your original question.  Any large institutional investor looking to trade in size will only get so far with trading on lit venues especially in the US equity marketplace.  Taking advantage of block liquidity/IOIs or floating part or all of an order in a dark pool is a good way to mask intentions and minimize market impact.  If you're part of a beta/index tracking strategy, you actually need to leverage auctions (index rebalances, like the MSCI, Russell, S&amp;P all have a ton of participants executing market on close orders to account for adds/deletes/reweights).    Overall, the buy side is becoming increasingly sophisticated when it comes to advanced execution, and it has been interesting to see how fintech companies, brokers, and exchanges have been feeding into the innovation. For me the aggressive approach makes sense since I have a longer time horizon before I need to withdraw the funds.  This style should also match your personality and you should have the patience and appetite to deal with market fluctuations which can be wild in some cases (as we saw in 2008-2009).  Not an easy question to answer since everyone's situation is different and everyone has to make their own decisions. In simple terms, this is how the shares are traded, however most of the times market orders are placed. Consider below scenario( hypothetical scenario, there are just 2 traders) Buyer is ready to buy 10 shares @ 5$ and seller is ready to sell 10 shares @ 5.10$, both the orders will remain in open state, unless one wish to change his price, this is an example of limit order. Market orders If seller is ready to sell 10 shares @ 5$ and another 10 shares @5.05$, if buyer wants to buy 20 shares @ market price, then the trade will be executed for 10 shares @ 5$ and another 10 shares @ 5.05$ "You can interpret prices in any way you wish, but the commonly quoted ""price"" is the last price traded. If your broker routes those orders, unlikely because they will be considered ""unfair"" and will probably be busted by the exchange, the only way to drive the price to the heights & lows in your example is to have an overwhelming amount of quantity relative to the order book. Your orders will hit the opposing limit orders until your quantity is exhausted, starting from the best price to the worst price. This is the functional equivalent to a market order." These statements aren't necessarily contradictory. In the first case, investors are bearish because they anticipate selling in the future (because all the interested buyers have bought, so all that remains in the short run are people willing to sell and therefore drive down the price).  In the second case, the trend is strengthened because the increase in volume indicates that the price movement interested a lot of traders. The trend could be bullish or bearish.  The statements aren't contradictory because the second case could very well lead to the first case. For example, if an increase in price is coupled with an increase in volume, this could indicate that the positive trend is strengthening (second case). Traders are becoming more interested in the price move, so they buy.  However, once all of the traders who are willing to enter the market long do so, we're in the first case. Investors realize that all of the traders who were interested in buying have bought, so they become bearish because they expect selling to start soon. They could have different quotes as there are more than a few pieces here.  Are you talking a Real Time Level II quote or just a delayed quote?  Delayed quotes could vary as different companies would be using different time points in their data.  You aren't specifying exactly what kind of quote from which system are you using here. The key to this question is how much of a pinpoint answer do you want and how prepared are you to pay for that kind of access to the automated trades happening?  Remember that there could well be more than a few trades happening each millisecond and thus latency is something to be very careful here, regardless of the exchange as long as we are talking about first-world stock exchanges where there are various automated systems being used for trading. Different market makers is just a possible piece of the equation here.  One could have the same market maker but if the timings are different,e.g. if one quote is at 2:30:30 and the other is at 2:30:29 there could be a difference given all the trades processed within that second, thus the question is how well can you get that split second total view of bids and asks for a stock.  You want to get all the outstanding orders which could be a non-trivial task. "Money is a tool. Here is an ""oversimplified"" order of investments:" He said he's using MSCI World as a benchmark. MSCI World is not an exchange. The point is the same security listed in different places has different prices, so how do you describe the equity beta of the company to MSCI World if you have multiple and different return streams? This is a real problem to consider and you just dismiss it entirely. The yahoo finance API is no longer which broke the Finance:Quote perl module.  The Finance:Quote developers have been quick to fix things and have produced several new versions in the last week or two.  The short of it is that you need to update Finance:Quote, then obtain an AlphaVantage free key and tell Gnucash to use AlphaVantage as it's source for online quotes by editing your securities in the Price Editor. What you have to remember is that Options are derivatives of another asset like stocks for example.  The price of the Option is derived from the price of the underlying. If the underlying is a stock for example, as the price of the stock moves up and down during the trading day, so will the Market Maker's fair value for the Option.  As Options are usually less liquid than the underlying stock, Market Makers are usually more active in 'Providing a Market' with Options. Thus if you place a limit order half way between the current Bid and Ask and the underlying stock price moves towards your limit order, the Market Maker will do their job and 'Provide a Market' at that price, thus executing your order. You typically need to specify that you want the GTC order to be working during the Extended hours session. I trade on TD Ameritrade's Thinkorswim platform, and you can select DAY, GTC, EXT or GTC_EXT. So in your case, you would select GTC_EXT. "https://www.fool.com/investing/general/2013/07/30/2-types-of-risk-2-types-of-bubbles.aspx (mirror): The Wall Street Journal reviews: What Mr. Bernstein calls ""shallow risk"" is a temporary drop in an asset's market price; decades ago, the great investment analyst Benjamin Graham referred to such an interim decline as ""quotational loss."" ""Deep risk,"" on the other hand, is an irretrievable real loss of capital, meaning that after inflation you won't recover for decades -- if ever. So quotational loss = loss not explained by change of actual value of a firm." The principle of demand-supply law will not work if spoofing (or layering, fake order) is implemented. However, spoofing stocks is an illegal criminal practice  monitored by SEC. In stock market, aggressive buyer are willing to pay for a higher ask price pushing the price higher even if ask size is considerably larger than bid size, especially when high growth potential with time is expected. Larger bids may attract more buyers, further perpetuating a price increase (positive pile-on effect). Aggressive sellers are willing to accept a lower bid price pushing the price lower even if ask size is considerably smaller than bid size, when a negative situation is expected. Larger asks may attract more sellers, further perpetuating a price fall (negative pile-on effect).  Moreover, seller and buyers considers not only price but also size of shares in their decision-making process, along with marker order and/or limit order. Unlike limit order, market order is not recorded in bid/ask size. Market order, but not limit order, immediately affects the price direction. Thus, ask/bid sizes alone do not give enough information on price direction. If stocks are being sold continuously at the bid price, this could be the beginning of a downward trend; if stocks are being sold continuously at the ask price, this could be the beginning of a upward trend.  This is because ask price is always higher than bid price. In all the cases, both buyers and sellers hope to make a profit in a long-term and short-term view