An order book, or limit order book, records passive limit orders available on a specific venue. The bid side displays offers to buy; the ask side displays offers to sell. The best bid and best ask form the top of book, and the distance between them is the bid-ask spread.
In plain terms — It is an updated snapshot of displayed liquidity waiting to trade. It is not the whole market: it depends on the exchange, feed, purchased depth and the time at which the data arrives.
What it contains
The book changes when an order is added, amended, cancelled or executed. Reading it means observing events, not only a static screen.
| Field | Meaning |
|---|---|
| Bid / ask price | Level at which passive liquidity is displayed |
| Size | Quantity displayed at that level |
| Number of orders | Available only from some feeds |
| Priority or order ID | Available in order-by-order feeds, not in every book |
| Timestamp / sequence | Time or logical order of the update |
A marketable order meets liquidity already present. The executed portion does not remain in the book; if it is a limit order with an unexecuted remainder, that remainder may rest passively according to its time in force and the venue rules. A non-marketable limit order may be added, reduced, repriced or cancelled before any execution.
L1, depth and feed formats
“I can see the book” can mean different things. L1 shows only the best quotes; a depth feed shows more levels; an order-by-order feed may distinguish individual orders.
- Level 1 / top of book: best bid, best ask and their sizes.
- Depth of book / Level 2: several levels beyond the best quotes.
- Market-by-Price (MBP): aggregates quantity by price.
- Market-by-Order (MBO): retains individual orders and, if the feed permits, their sequence.
Priority rules — for example, price-time or pro-rata — belong to the venue's matching engine and cannot be inferred from a chart alone. Coverage also varies: a NYSE, Nasdaq or Globex feed describes that perimeter, not automatically every market on which the instrument trades.
Spread, depth and execution cost
The spread measures immediate cost only for a quantity executable at the best price. If the order is larger than the available size, it may cross several levels: this is book walking. Expected cost therefore depends on quantity.
Example — Asks: 10.01 × 100; 10.02 × 200; 10.04 × 500. A market purchase of 250 units is not necessarily executed entirely at 10.01: 100 may execute at 10.01 and 150 at 10.02, before fees and latency.
Displayed depth is one component of liquidity, not a complete measure of it. Iceberg or reserve orders, dark pools, other venues, new orders arriving during execution and cancellations may change the result.
Imbalance: snapshot and flow
More bid quantity than ask quantity does not automatically mean “price will rise”. A snapshot of the queue differs from the flow of orders, cancellations and executions that changes it.
Queue imbalance compares displayed depth on the two sides at a given instant. Order-flow imbalance (OFI), by contrast, measures dynamic changes caused by new limit orders, cancellations and executions near the best quotes.
Research by Cont, Kukanov and Stoikov found, in a sample of equities and over short horizons, a relationship between price changes and OFI, with greater sensitivity in less-deep books. It is an empirical result conditional on the data, market and horizon; it does not turn a static imbalance into a guaranteed signal.
A large displayed order, often called a wall, demonstrates absorption only if executions against that level are observed and liquidity remains or replenishes. Its mere presence in the book is insufficient.
Advanced: data limits and possible manipulation
- Fragmentation: the same activity may be distributed across several venues and feeds.
- Hidden liquidity: not all available size is displayed.
- Latency: the book received by the reader may already have changed.
- Cancellability: a passive order is not an irrevocable commitment.
- Limited depth: some products show only a fixed number of levels.
Spoofing requires an intent to enter orders designed to be cancelled in order to create a false impression of supply or demand. Layering uses several apparent levels on the same side. Cancellation alone proves neither form of conduct.
Common mistake — Treating a large size as certain support or resistance. Before execution, the order may be reduced, cancelled, hidden behind other orders or overwhelmed by a larger flow.
To make a reading reproducible
- Market: state the venue and instrument.
- Data: specify L1, MBP or MBO and the number of levels.
- Time: record the timestamp and known latency.
- Quantity: compare depth with the size to be executed.
Sources
- U.S. Securities and Exchange Commission, Order Book Reporting Methods and Their Impact on Some Market Activity Measures — order-based and level-book feeds; displayed orders, cancellations, amendments and executions.
- New York Stock Exchange, NYSE Pillar Depth — official example of a feed containing ten bid/offer levels, size and venue attribution.
- Rama Cont, Arseniy Kukanov and Sasha Stoikov, The Price Impact of Order Book Events, Journal of Financial Econometrics, 12(1), 2014, pp. 47–88; preprint — order-flow imbalance, depth and short-term price changes.
- U.S. Commodity Futures Trading Commission, Antidisruptive Practices Authority — interpretation of the spoofing prohibition and the role of intent.