Who this is for — Anyone who wants to understand what exists behind the best bid and best ask, why an order can consume several levels and which information a book does not show.
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
In plain terms — 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
In plain terms — “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
In plain terms — 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.
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.