Order Book

Today, there are a large number of financial instruments and techniques that help any market participant, both novice and experienced trader, to analyze the market and quotes in depth. The key factor in the analysis is the ratio of supply and demand (sometimes referred to as order flow), which has an important impact on the value of the exchange’s assets. This relationship defines such a thing as an order book. Let’s take a closer look at this term.

What Is an Order Book

An order book is a list (table) of limit orders that are placed by participants in exchange trading operations on the exchange platform. This table shows the current bid and ask prices of the asset and makes it possible to predict the movement of quotations. There are two parameters in each line of the order book that display the price and its volume. At the same time, you can see the total indicator, as the orders of all traders with the same price are summed up. The order book, for brokers with access to the same market feed, appears identical, as it is aggregated by the exchange system and is visible to all participants in exchange trading.

An order book is a financial instrument through which an investor can draw conclusions about the supply and demand for an asset, analyze the investment attractiveness of an asset, and make a forecast about how a security’s price may move in the future. How an asset behaves depends significantly on its buy and sell orders, as the order book shows this ratio. An order book is a tool that all traders use, regardless of whether it is a long-term investment or scalping.

Traders engaged in long-term investing find important levels in the stock market, where large orders accumulate, which later can be sold or bought. Traders engaged in scalping must react promptly to changes in the market and make quick decisions on the purchase and sale of an asset. The real-time order book makes it possible to track orders and trading activity and form an investment strategy.

Terminology and Synonyms

The order book is called in different ways: a table of quotations, a price table, or orders. You can also find terms such as market depth or Level 2 data. Very often, the order book is confused with the market depth table, but the first term is broader. The order book is maintained by the exchange or market maker, which processes all orders.

The Depth of the Order Book

The depth characterizes the order book. Depth is determined by the terminal for brokers. Brokers most often use the QUIK terminal. The table shows 20 selling prices and 20 buying prices, i.e., 20 lines up and 20 lines down. The exchange can provide any depth; if a trader needs a greater depth than 20 by 20, he can request a different depth from the broker.

Aggressive and Passive Orders

Depending on the purpose, two types of orders can be distinguished in the order book: passive and aggressive.

• Passive orders are placed by traders who do not actively trade; they are concentrated near certain levels.
• Aggressive orders are most often placed by short-term traders and are concentrated near the current market price.

Such orders make it possible to narrow the spread and ensure relatively rapid movement of quotations within minor limits (market noise).

How to Read the Order Book

A trader should focus on several points when analyzing an order book:

• Large orders: Pay attention to large orders, as they often set a trend in the market. Analyze them at resistance and support levels, as well as at peaks, since large orders affect prices. Large orders can belong to any market participant, not only market makers.
• Iceberg orders: These cannot be fully detected in the order book. To find them, watch both the market feed and the quotation table simultaneously. Sometimes even then, the visible part of the order is too small and can get lost among other orders.
• Passive and active orders should be analyzed together to understand their interaction and help build a trading strategy.
• Split orders / recurring orders: Some traders divide large orders into smaller ones to enter positions discreetly. One order book alone may not detect these; observing the trade tape helps.
• Price impulses: Concentrations of buy or sell orders can create sharp price movements, hence the term “impulse”.

Effectiveness and Limitations of the Order Book

The modern market uses many tools and strategies. The order book is versatile and can support almost any trading strategy.

However, it also has drawbacks:

• Fictitious orders.
• Hidden orders.
• Displays only limit orders.

The order book is one of the main trading tools, and it is essential to understand how to use it correctly by analyzing the necessary data.