An order book is a real-time list of buy and sell orders for a financial instrument. It is used in many markets, including equities, and foreign exchange. Understanding this article focuses only on exchange-traded instruments; over-the-counter products such as CFDs do not have an order book and are not included.The order book shows the prices at which participants are willing to buy or sell, along with the amounts they wish to trade.
Understanding how an order book works can help traders interpret market activity and liquidity. It is a central feature of most modern electronic trading systems. The order book is continuously updated during trading hours as new orders are placed, existing orders are canceled, or trades are executed.
Let’s learn more!
What Is an Order Book?
An order book records all active buy and sell orders for a particular market. Each order contains a price and a quantity. Buy orders are called bids, and sell orders are called asks.
A full order book may include multiple price levels on both the bid and ask sides, showing the total quantity available at each price.
Order books are updated continuously as new orders are placed, existing orders are canceled, or trades are executed. This creates a dynamic picture of market supply and demand.
The Structure of an Order Book
Order books are typically divided into two main sections:
- Bid side. This lists all current buy orders, sorted from the highest bid price downwards.
- Ask side. This lists all current sell orders, sorted from the lowest ask price upwards.
Each side can contain multiple price levels, showing the total quantity available at each price.
Between these two sides is the spread. This is the difference between the highest bid and the lowest ask. The spread is a measure of market liquidity. A narrow spread can indicate more active trading, while a wide spread can suggest lower activity.
Example of an Order Book
The table below shows a simplified order book for an example market. This is for educational purposes only.
| Bid Price | Bid Volume | Ask Price | Ask Volume |
| 99.80 | 300 | 100.20 | 250 |
| 99.70 | 200 | 100.30 | 400 |
| 99.60 | 150 | 100.40 | 350 |
Here, the highest bid is 99.80 and the lowest ask is 100.20. The spread is 0.40.
How Orders Enter the Order Book
Orders can be placed in different ways depending on the participant’s strategy and needs.
- Limit orders specify a price and volume. They remain in the order book until matched or canceled.
- Market orders are executed immediately at the best available price and usually do not remain in the book.
- Stop orders become active once the market reaches a specified price level.
All these order types contribute to how the order book changes over time. In addition, orders at the same price are prioritized according to the time they were entered (price–time priority).
The Role of Bids and Asks
The bid side represents buyers who are willing to purchase at specific prices. The highest bid is the most competitive buying price at that moment.
The ask side represents sellers who are offering to sell at specific prices. The lowest ask is the most competitive selling price available.
When a buy order matches a sell order, a trade occurs. The matched quantities are removed from the order book, and if the order size exceeds available quantities at a price level, it may be partially filled and the remainder stays in the book or moves to the next level.
Understanding the Spread
The spread is the gap between the best available bid and ask. It is an important indicator for market participants.
Some key points about spreads:
- A narrow spread often occurs in highly liquid markets with many active orders.
- A wide spread can appear in less liquid markets or during periods of low activity.
- Transaction costs for some participants may be influenced by the spread size.
- Spreads can change quickly in response to market news, order flow, and changes in supply and demand.
In exchange-traded instruments, the spread is simply the difference between the highest bid and the lowest ask in the order book, and is not set by a dealer.
Depth of Market
Depth of market refers to how much volume is available at each price level in the order book. A market with large volumes on both sides of the book is considered deep. Shallow markets have fewer orders and can see larger price moves when new orders arrive.
Monitoring market depth can help participants understand how much activity is needed to move prices, and that the visible depth may change continuously during the trading session as orders are added, canceled, or executed.
Why Order Books Matter
Order books provide transparency in many electronic markets. They allow participants to see the current supply and demand as well as how prices might move if large orders enter the market.
They are also useful for identifying short-term support and resistance levels based on where large concentrations of bids or asks are located.
These observations apply to exchange-traded instruments only, and may not represent OTC products such as CFDs.
Conclusion
An order book is a key tool for viewing the bids, asks, and spreads in a market. It shows the current supply and demand for an instrument in real time. Understanding how bids, asks, and spreads work can give participants better insight into market activity and liquidity.
FAQ
1. What is an order book in trading?
An order book displays live buy and sell orders for an asset, showing the prices and volumes traders are willing to transact at in real time.
2. What are bids and asks in an order book?
Bids represent buy orders at specific prices, while asks represent sell orders. The interaction between them determines the current market price.
3. What is the spread in trading?
The spread is the difference between the highest bid and lowest ask price, representing a key cost traders consider when entering and exiting positions.
4. Why should traders understand order books?
Understanding order books helps traders assess liquidity, price pressure, and potential short-term movement, improving timing and execution decisions.
