What is an Order Book?

What is an Order Book?

An order book is a real-time list of all pending buy and sell orders for a particular asset on an exchange. It is the engine that drives price discovery and trade execution. Every exchange, whether centralized or decentralized, uses some form of order book to match buyers with sellers.

The Structure of an Order Book

An order book has two sides:

Bids (Buy Orders)

The bid side shows all pending buy orders. These are traders willing to buy the asset at a specific price. Bids are arranged from highest to lowest price. The highest bid is called the “best bid” because it is the best price currently available for someone looking to sell.

Asks (Sell Orders)

The ask side shows all pending sell orders. These are traders willing to sell the asset at a specific price. Asks are arranged from lowest to highest price. The lowest ask is called the “best ask” because it is the best price currently available for someone looking to buy.

The Gap Between Them

The difference between the best bid and the best ask is called the “spread.” When a buyer is willing to pay the ask price (or a seller is willing to accept the bid price), a trade is executed.

Reading an Order Book

Here is a simplified example of an order book for ETH:

Asks (Sell Orders)

Bids (Buy Orders)

In this example, the best bid is $2,000, the best ask is $2,001, and the spread is $1.

What is Market Depth?

Market depth refers to the volume of orders at each price level. A “deep” order book has large amounts of orders stacked at many price levels, which means large trades can be executed without significantly moving the price. A “thin” order book has fewer orders, meaning even modest trades can cause notable price swings.

Why depth matters:

• Deep markets are more stable and harder to manipulate. Large buy or sell orders can be absorbed without dramatic price changes.
• Thin markets are more volatile. A single large order can push the price up or down significantly, which is called “slippage.”

How Orders Get Matched

When a new order arrives at the exchange, the matching engine checks if it can be filled against existing orders:

1. A market buy order is matched against the lowest available ask prices, starting from the best ask and moving up until the order is fully filled.
2. A limit buy order is placed on the bid side if the specified price is below the current best ask. It waits there until a seller is willing to match it.
3. If a limit buy order’s price is at or above the best ask, it is immediately matched like a market order.

The same logic applies in reverse for sell orders.

Order Books and Grid Bots

Grid bots interact with the order book constantly. They place limit buy orders on the bid side at various grid levels and limit sell orders (take-profit) on the ask side. Because grid bots use limit orders, they add liquidity to the order book rather than removing it. This makes them “market makers” and typically qualifies them for lower trading fees.

Summary

• An order book is a real-time list of all pending buy (bid) and sell (ask) orders, with the spread being the gap between the best bid and best ask.
• Market depth indicates how much volume exists at each price level, with deeper books providing more stability and less slippage.
• Grid bots add liquidity to the order book by placing limit orders on both sides, acting as market makers.

Next Step

The gap between bids and asks has important implications for your trades: Bid, Ask, and Spread