Loading...

Understanding the Orderbook

by CryptoDataDownload

p class="first-letter">Markets use an orderbook to facilitate price discovery. This article will demystify exactly what is the orderbook and how does it work. Given that the main purpose of a market is price discovery, an orderbook is quite simply a list of willing buyers and sellers and the price(s) at which they are willing to conduct a trade. Before we discuss further, it is important to understand two basic order types in a market (there are other order types outside the scope of this article): the market order and the limit order. The market order (buying or selling "at market") will execute the transaction at the best available bid or ask in the orderbook and will fill the order immediately. In contrast, the limit order "rests" in the market, and tells the exchange to execute the order "at this price or better". Limit orders are not necessarily executed, and highly dependent on the direction of price movement and action of market participants.

Now that we understand the difference between a limit order and a market order, we can discuss how the orderbook is composed of bids and asks. A bid is the maximum price that an investor is willing to pay for a security. Conversely, the ask is the minimum price a seller is willing to accept for the security. (Longer Investopedia definitions) So for example, let us say hypothetically that we want to BUY Bitcoin, but we do not want to pay more than $19,000. We would submit a limit order to the exchange for that $19,000 price and the amount of BTC that we want to purchase at that price. Someone else, who already owns BTC and hypothetically wants to sell, but does not want to sell for less than $19,050, will submit a limit order at that price and for their amount. The buy order will represent a bid in the orderbook, and the sell order will represent an ask in the orderbook. The difference between the bid and the ask is referred to as the "spread", and in this hypothetical is $50.

the orderbook is quite simply a list of willing buyers and sellers and the price(s) at which they are willing to conduct a trade

CryptoDataDownload

So in summary, the orderbook is a list of all of the limit buy orders stacked in price from highest to lowest (example, $19,000; $18,998; $18,990.. and so on) and the limit sell orders ordered from lowest to highest (example, $19,050; $19,051; $19,065 and so on..). If everyone simply listed the prices they were willing to buy and sell at, how do trades actually get executed? ... Market orders! We will discuss how a market functions using the orderbook in an upcoming article.



Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Author does not own the any crypto currency discussed. The information and content are subject to change without notice. CryptoDataDownload and its affiliates do not provide investment, tax, legal or accounting advice.

This material has been prepared for informational purposes only and is the opinion of the author, and is not intended to provide, and should not be relied on for, investment, tax, legal, accounting advice. You should consult your own investment, tax, legal and accounting advisors before engaging in any transaction. All content published by CryptoDataDownload is not an endorsement whatsoever. CryptoDataDownload was not compensated to submit this article. Please also visit our Privacy policy; disclaimer; and terms and conditions page for further information.



Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Author does not own the any crypto currency discussed. The information and content are subject to change without notice. CryptoDataDownload and its affiliates do not provide investment, tax, legal or accounting advice.

This material has been prepared for informational purposes only and is the opinion of the author, and is not intended to provide, and should not be relied on for, investment, tax, legal, accounting advice. You should consult your own investment, tax, legal and accounting advisors before engaging in any transaction. All content published by CryptoDataDownload is not an endorsement whatsoever. CryptoDataDownload was not compensated to submit this article. Please also visit our Privacy policy; disclaimer; and terms and conditions page for further information.

THE PERFORMANCE OF TRADING SYSTEMS IS BASED ON THE USE OF COMPUTERIZED SYSTEM LOGIC. IT IS HYPOTHETICAL. PLEASE NOTE THE FOLLOWING DISCLAIMER. CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. U.S. GOVERNMENT REQUIRED DISCLAIMER: COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Latest Posts
Follow Us
Notify me of new content
About

Step into the full potential of your cryptocurrency research and market analysis with CryptoDataDownload. Access free historical data in CSV format, unlock unusual option activity signals, explore Plus+ Python code examples (where every line of code is commented), and tap premium aggregated file resources and bespoke data sets. Trusted by academics worldwide, we offer comprehensive data to empower traders, researchers, and enthusiasts alike.

Services
Quick Links
Contacts