What is an order book?

Think of a bulletin board where half the notes say “I’ll buy for up to this much” and the rest say “I’ll sell from this much.” That is roughly how an order book works, except that it updates constantly as orders are placed, filled or canceled.

Each book covers a specific trading pair, such as BTC/EUR, on that particular platform. On one side are the buy offers (bids) and on the other the sell offers (asks). The highest buy price and the lowest sell price are the best available offers. The difference between them is called the spread. The screen usually adds up the quantities of all orders sitting at the same price.

Say that in a hypothetical book, 100 tokens are for sale at €2 and another 100 at €2.10. A market buy order for 150 tokens will first take the 100 cheaper ones and then 50 from the next level, as long as the offers are still available. A limit buy order at €2, on the other hand, won’t buy at a higher price; its unfilled portion may stay on the book, depending on its settings.

Why it matters

The price you see on the chart doesn’t tell you how many coins you can trade close to it. The depth of the book, i.e. the quantities available at different price levels, helps you understand the liquidity of that particular market.

When little quantity is available, a larger order may be filled at several different prices. That results in slippage, a deviation from the expected execution price. We find the order book useful for understanding execution conditions, not for guessing the price’s next move.

What to watch out for

Pending orders are not completed trades. A large buy order can be canceled before it is filled. So-called buy or sell “walls” therefore don’t guarantee that the price will stop there.

Also, you only see that platform’s market, not the coin’s entire market. The picture can change by the time your order arrives, and some quantities may not be fully displayed.