What an order book is

There is no price. There is a highest amount somebody is currently willing to pay, a lowest amount somebody is currently willing to accept, and a gap between them where nothing is happening.

The number displayed as “the price” is usually the last trade — a fact about the past — or the midpoint of that gap, which is a number nobody has agreed to. Neither is what you’ll pay. Once that’s clear, most of the surprises in execution stop being surprising.

The structure

A limit order book is two sorted lists of unexecuted orders held by a venue.

The bid side holds buy orders, each with a price and a quantity, sorted highest price first. The ask side (or offer side) holds sell orders, sorted lowest price first. The highest bid and lowest ask are the top of book, and the gap between them is the spread.

Illustrative, with round synthetic numbers:

        ASKS (sellers)
        40,020   × 4.0
        40,010   × 2.5
        40,004   × 1.2
        ─────────────────  spread: 40,004 − 40,000 = 4
        40,000   × 3.0
        39,995   × 6.0
        39,980   × 12.0
        BIDS (buyers)

Nothing trades in the gap. The book above is stable — every buyer wants to pay less than every seller wants to receive — and it will stay stable until someone changes their mind or a new order arrives that crosses.

What makes a trade

A trade happens when an incoming order crosses the book: a buy order priced at or above the best ask, or a sell order priced at or below the best bid.

The incoming order is matched against resting orders on the opposite side, starting at the best price and working outward. It consumes them until it is filled or until it runs out of orders it’s willing to trade against.

In the illustrative book above, a market buy for 1.0 unit takes 1.0 from the 40,004 level and fills entirely at 40,004. A market buy for 3.0 units takes all 1.2 at 40,004, then 1.8 of the 2.5 at 40,010 — an average of about 40,007.6. The order that was twice as large got a worse average price, and nothing unusual happened.

That’s the origin of slippage and market impact, and it’s purely a consequence of the book being a list rather than a single number.

Makers and takers

The two roles follow directly from the structure, and the entire fee model rests on them.

A maker places an order that rests in the book — it doesn’t cross, so it sits there adding depth and waiting. They are making liquidity available.

A taker places an order that crosses immediately and consumes resting orders. They are taking liquidity out of the book.

The distinction is about what the order did on arrival, not about intent or direction. A buy can be either. So can a sell. An order that rests and is later matched by someone else’s incoming order was a maker order, however long it waited. Venues price these two roles differently, and usually not symmetrically.

Priority

When several resting orders sit at the same price, something has to decide which fills first. The most common rule is price-time priority: better prices fill first, and within a price level, whoever arrived first fills first.

This creates a queue at each price level. Being early in the queue at a given price is a real advantage — your order fills before the ones behind it, and if the level is only partially consumed, the orders behind you don’t fill at all.

Two consequences worth knowing. Amending an order’s price or increasing its size typically loses queue position, because it’s treated as a new order. And in fast markets a level can be consumed before deep-queue orders at that level are reached, which is why an order at exactly the touch price can watch the market trade through it and still not fill.

Some venues use other rules, including pro-rata allocation, where a fill at a level is distributed proportionally across resting orders rather than sequentially. Which rule applies is a venue decision.

The mechanism

THE MECHANISM — a book and an incoming order

  · Order priced beyond the opposite touch
                    → crosses. Matches immediately
                      against resting orders, best
                      price first, outward.

  · Order priced inside or at your own side
                    → rests. Joins the queue at that
                      level and waits.

  · Order larger than the top level
                    → consumes multiple levels. Average
                      fill is worse than the touch.

  · Resting at the touch price
                    → NO GUARANTEE of a fill. The level
                      can be consumed before your place
                      in the queue is reached.

  · Amending price or increasing size
                    → generally loses queue position;
                      treated as a new order.

  · Allocation within a price level
                    → VENUE-SPECIFIC. Price-time is
                      common; pro-rata and hybrid
                      rules exist.

Depth and what the spread means

Depth is how much quantity is resting near the touch. A book with large quantities at each level absorbs incoming orders with little price movement; a thin book doesn’t, and a modest order can walk through several levels.

Depth is asymmetric and changes constantly. There is no reason for the bid side and ask side to be equally deep at any moment, and reading anything predictive into that asymmetry is outside what this site does.

The spread is a cost, and it’s the clearest one to see. Buying at the ask and immediately selling at the bid loses the spread — in the illustrative book, 4 per unit, before any fees. That round trip is instantaneous and guaranteed to lose. Whatever else is true, the spread is the entry price for crossing the book twice.

Spreads widen when depth thins, and the two move together, which is why the visible cost of trading rises exactly when the book is least able to absorb size.

What the book doesn’t show you

Several things, and assuming otherwise is a common error.

Orders that haven’t been placed. Participants who would trade at a price but haven’t posted an order are invisible, and they can appear the instant the price gets there.

Hidden and iceberg orders. Many venues support order types where only part of the quantity is displayed, or none of it. Visible depth is a lower bound on real depth, not a measurement of it.

Intent. A resting order is a standing offer, not a commitment. It can be cancelled at any moment, and in fast markets a great deal of displayed depth disappears rather than being traded against.

Anything about the future. The book is a snapshot of current unexecuted intentions. It has no predictive content that this site will comment on.

The failure mode

The book is a live structure, and everything about it can change between the moment you read it and the moment your order arrives. There is a delay — network, venue queueing, matching — and in that window levels can be consumed, orders cancelled, and the touch moved.

Which means the book you priced your order against is not necessarily the book it met. That gap is irreducible; it can be small, and it is never zero. Every mechanism on this site is downstream of it, and no order type removes it — they only change which of price or execution you give up when it bites.