Core Idea

An order book is a real-time ledger of buy and sell interest for a financial asset. It is used by a matching engine to determine how trades are executed between buyers and sellers.

An order book contains:

• Buy orders (bids) → what buyers are willing to pay
• Sell orders (asks) → what sellers are willing to accept

A trade happens when:

a bid price matches or exceeds an ask price

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Price Levels

Orders at the same price are grouped into a price level.

At a given price:

• multiple buy/sell orders can exist
• they are executed in priority order (usually time priority)

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Top of the Book

The most important prices in the market:

• Highest bid (best buy price)
• Lowest ask (best sell price)

$\text{Bid-Ask Spread} = \text{Lowest Ask} - \text{Highest Bid}$

Meaning:

The spread measures liquidity and trading cost

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Crossed Book

A book is crossed when:

• highest bid ≥ lowest ask

This implies:

trades can execute immediately (orders overlap in price)

Normally:

• this condition is temporary in efficient markets

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Book Depth

Depth = how many price levels exist

• shallow book → low liquidity, higher volatility
• deep book → high liquidity, more stable pricing

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Matching Engine

The system that processes orders:

• matches buyers and sellers
• prioritizes price first, then time
• determines trade execution

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Market Interpretation

Order books reveal:

• supply and demand at different price levels
• liquidity concentration
• short-term price pressure

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Key Insight

Price is not just a single number—it is the result of competing layered orders across a structured market.

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One-line Summary

An order book is a dynamic list of buy and sell orders organized by price levels, where a matching engine executes trades based on price-time priority, revealing real-time market supply and demand.