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Order Driven Market Simulation
(excerpted from Chapter 3, How To Use Limit and Market Orders, in Robert A. Schwartz, Reto Francioni and Bruce W. Weber, The Equity Trader Course, John Wiley & Sons, 2006)

A pure order driven market is a trading environment where all of the participants are investors seeking to buy or to sell shares for their own portfolio purposes. Trades occur in the order driven market because the participants differ from each other in two fundamental ways. The first way is obvious - some investors are seeking to buy shares and others are looking to sell shares. The second way is more subtle - some investors choose to place limit orders and others decide to trade by market order. The environment is called "order driven" because the limit orders that are placed by some of the participants set the prices at which others can trade by market order.

Participants in a pure order driven market are referred to as "naturals" (the natural buyers and sellers). No intermed iary participates as a trader in a pure order driven market. Rather, the investors supply liquidity to themselves: the natural buyers are the source of liquidity for the natural sellers, and vice versa. The naturals fall into four groups: market and limit order buyers, and market and limit order sellers. For trading to be possible, the buyers need the sellers (and vice versa), and for trades to be realized the limit order placers need the market order placers (and vice versa). Because of this interdependency between the groups, we view the order driven market as an ecology, and consider how the market achieves an ecological balance.



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