Order Book
The real-time list of buy and sell orders for a security at various price levels, showing the depth of supply and demand at each price.
Order Book · the mechanism
30 sec read
Read depth on both sides of a book, work out what a market order actually fills at, and explain slippage.
Where it comes up. A PM asks how quickly the position could be exited if it had to be, which is a question about depth rather than about the quote.
Read the book as two queues
Bids stack downwards from the best price, offers stack upwards. Each level shows the total size resting there. The best bid and best offer together are the touch; the gap between them is the spread.
Understand the queue
Within a price level, most venues fill in the order the orders arrived: price first, then time. That is why a passive order at the touch is worth queue position, and why cancelling and re-entering at the same price sends you to the back.
Walk the book
A market order takes the best price until that level is exhausted, then the next, then the next. Your average fill is a size-weighted blend of the levels you consumed. The difference between that average and the touch is slippage, and it grows with your order, not with the quoted spread.
Worked through
Buying 16,000 shares into offers of 3,000 at 250.20, 9,000 at 250.40 and 14,000 at 250.60.
- 3,000 at 250.20
- £750,600
- 9,000 at 250.40
- £2,253,600
- 4,000 at 250.60 (partial fill of that level)
- £1,002,400
- Total for 16,000 shares
- £4,006,600
Average fill 250.41 against a 250.20 touch: 21p of slippage, more than the entire 40p spread would suggest for a small order. Depth, not the spread, is what a large order pays.
Check yourselfThe touch is unchanged all morning but the size at each level halves. Has the stock become cheaper or more expensive to trade?
Answer once you have one →
More expensive, for anyone trading size. The quoted spread has not moved, and that is the number on the screen and in most liquidity statistics, but every order now walks further up the book. This is why execution desks measure realised slippage rather than quoted spreads.
Be able to say this back next week
- Described price-time priority and why queue position has value
- Said a market order walks the book and the average fill blends the levels consumed
- Named depth rather than the spread as what a large order actually pays
Why Order Book matters in interviews
The order book is where an abstract price becomes a real one. Trading interviews use it to test whether a candidate understands that a quoted price is a promise about a specific size, and the market-structure questions come straight out of it: what happens to your fill if the book thins, why a large order moves the market. It is also the mental model behind almost every question about liquidity in an investing interview.
How it works in practice
Modern equity venues run a central limit order book with price-time priority: better prices execute first, and within a price level the order that arrived first executes first. That second rule is why queue position has value, and why an algorithm that repeatedly cancels and re-posts at the same price is giving something up each time.
Order types change what you see. A hidden or iceberg order displays only part of its size, so the visible book understates true depth in some names. Auctions, meaning the open, the close and any volatility auction, collect orders and cross them at a single price, which is why the closing auction is often the largest liquidity event of the day and why index funds trade there.
The imbalance between resting bid and offer size is a widely used short-horizon signal, and a widely misused one. It is informative at the horizon of seconds and easily manufactured by orders that will be cancelled before they trade.
The same structure appears far from equities. A crypto exchange book, a futures book and an electronic government bond platform all work this way. A corporate bond, by contrast, mostly does not: much of that market is still quote-driven, which is a large part of why its spreads are wider.
What candidates get wrong
- Reading the visible book as the whole book. Hidden size and orders sitting off-venue mean depth is routinely understated.
- Assuming a market order executes at the touch. It executes at the touch only for the size resting there, and climbs from that point.
- Confusing the spread with the cost of trading size. For anything larger than the touch, depth dominates.
- Treating book imbalance as a reliable directional signal. Resting orders can be cancelled, and are.
Order Book: frequently asked questions
What is an order book?
The live list of resting buy and sell orders for an instrument, organised by price level, with the total size available at each level. Bids stack downwards from the best bid, offers upwards from the best offer, and the gap between the two best prices is the spread. It is the mechanism by which a venue decides who trades with whom, and at what price.
What is price-time priority?
The matching rule used by most electronic venues. Orders are ranked first by price, so the highest bid and lowest offer execute first, and then, among orders at the same price, by the time they arrived. It is why joining the touch early is worth something, and why an order that is cancelled and re-entered at the same price loses its place in the queue.
What is slippage?
The difference between the price you expected and the average price you achieved. For an order larger than the size resting at the touch, it comes from walking up successive price levels. Buying 16,000 shares against offers of 3,000 at 250.20, 9,000 at 250.40 and the balance at 250.60 gives an average of about 250.41, which is 21p worse than the touch on a quoted spread of 40p.
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