Order Book

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Order Book Meaning

An order book electronically records all open (buy and sell) orders for a specific stock, bond, derivative, currency pair, futures, or cryptocurrency. It also lists the order history by price and volume. Thus, it helps traders and analysts understand market trends, popular securities and make informed investment and trading decisions.

The electronic book contains different prices for various bids for an underlying asset, indicating buyer and seller interest at that price. It also provides valuable information on market participants, investor sentiment, market depth, order imbalance, spreads, and the potential order execution. An exchange can offer more than one order book for stocks, depending on the financial instruments.

Table of contents
what is order book
  • An order book electronically lists buy and sell orders for a specific stock, bond, derivatives, currency pair, futures, or cryptocurrency by volume and price.
  • It provides data on market participants, investor sentiment, market depth, order imbalance, spreads, and the possibility of order execution.
  • The book updates in real-time, allowing traders to identify market trends, popular securities and make informed investment decisions. They can formulate different strategies using the trading pattern, timing, algorithms and charts, and automatic order matching.
  • Besides bid and ask offers, the continuous book contains open order history and market, stop-loss, limit, and trailing stop orders.

Explanation Of Order Book

An order book is a helpful trading instrument for investors trying to maximize their profits. It typically contains the history of buy (bid) and sells (ask) offers. Besides open trades, the book contains various other orders like market, stop-loss, limit, and trailing stop. It also provides traders with market depth. The latter refers to a market's ability to withstand the trading of many orders without causing a significant change in the price of securities. Traders can determine the best moment to purchase or sell it knowing the average security price.

order book components

The continuous book shows the total volume of orders for a specific asset at all price levels. It also informs about retail investors or institutional investors involved in the trade. In addition, it provides other valuable data like bid-ask spread, order imbalance, and investor interest, driving market trends.

It runs electronically and updates in real-time throughout the trading day, hence also called the continuous book. Instant updates enable traders to analyze trading patterns for security and trade confidently. However, they have to pay a fee to the exchange to get the information. Earlier, there was an order book for stocks only, but now cryptocurrency marketplaces have also started using it.

Order Book Explanations in Video

 

Advantages Of Order Book

The introduction of the order book trading instrument intends to promote transparency on stock exchanges. It not only reveals traders who initiate trades, but it also indicates prices that each buyer and seller are ready to accept. It, thus, makes market manipulation more difficult.

Order Book Advantages

An example of market manipulation is the deliberate dumping of too many shares on the market to decrease the company's value. Moreover, investors can conceal their identity while trading by investing in dark pools. Traders can spot it simply with the continuous book and question the validity and motives of such a trade. The United States Securities and Exchange Commission (SEC) can investigate it. If it discovers delinquency, the SEC has the authority to halt a deal to avoid upsetting the market in that security.

Traders can also use this tool to spot potential support (a large number of purchase orders at a specific price) and resistance (a large number of sell orders at or near a particular price) levels.

Example

An order book example is that of NASDAQ TotalView. It claims to be the most comprehensive book available in the U.S. and possibly worldwide. TotalView is a critical source of information for day and experienced traders and financial analysts. It provides real-time data for securities available on NASDAQ, NYSE, and NYSE American.

TotalView also provides historical trading volumes and prices for different securities. The Net Order Imbalance Indicator (NOII) present in TotalView can help with the technical evaluation of these securities. Traders can opt to buy or sell securities based on this information.

Many other stock exchanges and independent companies feature books similar to the NASDAQ continuous book. They may, however, differ in terms of the sorts of securities listed and the additional tools available to help a trader interpret the data.

Order Book Trading Strategies

A trader must use a short-term strategy based on order volumes, prices, and market trends before trading securities using a continuous book. For example, a book showing more buy orders than sell offers indicates a bullish market. Traders can adopt different strategies to determine various elements of trading based on the information received from the continuous book, such as:

Uses

#1 - Security Trading Pattern

The historical data in the continuous book helps traders determine whether a stock is following a bullish or bearish market trend. For example, if the price is consistently rising, one can safely assume that it will continue to increase for some time before taking a downturn. It can be a sign to buy the stock and then sell it for a profit.

#2 - Trading Timing 

The continuous book provides insight into whether the price of a security is about to get unstable or change its historical pattern. It encourages traders to take action to minimize potential losses. For instance, if they acquired stock and the data suggests an increase in its price, they can sell it at the current price for a profit before the price declines.

#3 - Trading Algorithm 

The abundance of data helps traders who prefer technical analysis over fundamental or sentimental analysis use trading algorithms. They can use this data to evaluate the market and determine whether it is appropriate to trade. They may, for example, utilize a stochastic indicator and then fine-tune its settings using the order book in stock market. It is helpful for short-term trading.

#4 - Automatic Order Matching

The continuous book also allows traders to match orders automatically per their preferences and market supply and demand. For example, in the case of a limit trade book, the trader can set a price level for buying or selling a security. When the price hits that threshold, an order gets automatically fulfilled.

These are just a few examples of how a continuous book might help traders develop an order book trading strategy. There are even more options, such as analyzing recent chart patterns to determine the market behavior.

Frequently Asked Questions (FAQs)

How to read stock order books?

Order or continuous books provide open offers and order history for a particular asset at all price levels and total volumes. One can find the electronic or manual sell (red) and buy (green) orders for stocks, bonds, derivatives, currencies, futures, cryptocurrencies on the bottom or top or the right and left of the book, respectively, depending on the exchange.

How does an order book work?

An order book in stock market lists all purchase and sell orders for different assets at various price levels, along with traders involved in the trade. It provides real-time market depth data to traders and financial analysts, allowing them to comprehend market movements and make informed trading decisions. This tool is available on almost every stock and cryptocurrency exchange.

What is a limit order book?

A limit order book contains orders that a trader intends to buy or sell at a specific price based on their preferences and market condition. When the price hits the limit, the order gets executed automatically.