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HMRC internal manual

Stamp Taxes on Shares Manual

Financial markets: issue and trading of shares: order and quote driven markets

Once shares in a company have been issued there are two types of ‘market’ used for the trading of shares in public companies and other securities - order-driven or quote-driven. See STSM071000 for information on types of shares and how they are issued.

Order-driven market

Although securities can be purchased or sold privately between individuals, the majority of sellers and buyers will usually employ the services of a broker to act on their behalf. The broker will try to find a corresponding buyer or seller (matching counterparty) to fulfil their client’s order. The broker will charge a commission for arranging the transaction.

Many exchanges operate electronic order book systems which enable brokers to input orders to buy and sell shares. If an incoming order matches against an order already on the order book in terms of price, the orders are automatically executed against each other.

The London Stock Exchange (LSE) operates an order-driven market for the shares of the largest UK companies (‘FTSE 100’), and the New York and Tokyo stock exchanges are also predominantly order-driven markets. The LSE runs two electronic order book systems - SETS and SETSqx (See STSM122020).

Quote-driven market

In a quote-driven market, buyers and sellers have brokers acting on their behalf but instead of trying to find a matching counterparty the broker arranges the transaction with a market maker (See STSM124040).

Market makers quote share prices in various securities using a computerised screen based system. They quote a price for buying and for selling the particular shares (‘bid price’ and ‘offer price’ or ‘ask price’), and this pricing structure builds in their profit margin - the ‘spread’ is the difference between the bid and offer prices. Having made an investment decision, the purchaser’s broker will usually execute the deal with the market maker by telephone, although a number of markets now operate electronic systems.

The LSE runs an electronic quotation system, SEAQ (Stock Exchange Automated Quotation) where market makers can quote prices for AIM securities (which are not traded on either SETS or SETSqx) and other fixed interest securities. The NASDAQ US exchange is also an electronic quote driven market.