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The order book

The order book is the real-time list of all buy and sell orders waiting to execute at each price level. At any given moment, thousands of investors and traders have placed orders into the exchange, and the order book displays the current state of that demand and supply. The best bid is the highest price anyone is willing to pay to buy right now. The best ask is the lowest price anyone is willing to accept to sell right now. The difference between them—the spread—is the cost of immediate execution. Everything you need to understand about price discovery and liquidity lives in the order book.

Reading the order book requires understanding its layers. The top of the book shows the best bid and ask—the most competitive prices currently available. Below that, Level 2 data shows deeper layers of orders waiting at less competitive prices. Volume at each price level indicates how many shares are willing to trade at that price. As your order enters the book, it either executes immediately (if you're willing to accept the current best price) or joins a queue at your specified price level, waiting for the market to come to you. The order book is constantly changing—orders arrive, execute, and cancel within microseconds during normal trading.

The order book structure reveals much about market health and liquidity. A "thick" order book with many orders at many price levels indicates good liquidity and tight spreads. A "thin" order book with few orders and wide spreads indicates low liquidity and higher execution costs. During normal hours in large-cap stocks like Apple or Microsoft, the order book is thick and spreads are measured in pennies. During pre-market or after-hours, or in small-cap stocks, the book thins dramatically and spreads widen. Market makers profit partly by reading the order book for clues about market direction and then adjusting their quotes accordingly. Learning to read the order book teaches you to assess liquidity and understand the microstructure that underlies every trade.

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