A list of intentions
An order book is a live list of the orders that traders have placed but that have not yet traded. It is split into two sides.
- Bids are orders to buy. They are listed from the highest price down.
- Asks (also called offers) are orders to sell. They are listed from the lowest price up.
The top of the book is where the two sides meet: the best bid is the highest price a buyer is currently willing to pay, and the best ask is the lowest price a seller currently accepts. Because the best bid sits below the best ask, nothing trades until someone is willing to cross the gap, a cost discussed in the article on the bid-ask spread.
What each row shows
A typical display has three columns: price, size and sometimes a running total.
Take a simplified example with invented numbers.
| Side | Price | Size | Cumulative size |
|---|---|---|---|
| Ask | 100.30 | 2 | 8 |
| Ask | 100.20 | 3 | 6 |
| Ask | 100.10 | 3 | 3 |
| Bid | 99.90 | 4 | 4 |
| Bid | 99.80 | 5 | 9 |
| Bid | 99.70 | 6 | 15 |
Here the best ask is 100.10 for 3 coins and the best bid is 99.90 for 4 coins. The cumulative column adds up quantity as you move away from the middle: eight coins are on offer within 100.30, and fifteen coins are bid down to 99.70. That running total is what depth charts draw as a staircase on each side.
How orders get matched
Most exchanges use price-time priority. Better prices go first: the highest bid and lowest ask. At the same price, whoever arrived earlier is served first. When a market order arrives, it takes quantity from the best level, then the next, and so on. If someone sends a buy for 4 coins in the table above, 3 fill at 100.10 and 1 at 100.20, which leaves 2 coins remaining at 100.20 and changes the best ask. This is how a trade moves the quoted price, and the cost relative to the first level is slippage.
When a new limit order does not match anything, it joins the book at its price and waits in the queue. Cancelling or modifying it is possible at any time until it is matched, which is why the book changes constantly.
Reading depth
Depth tells you how much quantity stands near the current price. Large sizes close to the best prices suggest a trade of moderate size could be absorbed without much movement. Small sizes, or big gaps between levels, suggest the opposite. This is the heart of the idea covered in the article on liquidity and market depth.
Some people also look at the balance between total bid size and total ask size within some distance of the market, sometimes called imbalance. A heavy bid side is sometimes read as buying interest and a heavy ask side as selling interest. This is only a rough reading. Resting orders are not commitments and are not predictions, so imbalance does not reliably indicate where the price will go.
A snapshot, not a forecast
The book shows what people are willing to do at this moment. It says nothing certain about what they will do next. Several features limit how much you can infer.
- Orders can be cancelled instantly. Large orders that appear can vanish before the price reaches them.
- Spoofing. Placing large orders with no intention of letting them fill, to give a false impression of demand or supply, is a form of market manipulation and is illegal in many places. Experienced traders treat unusually large, static orders with caution, as the article on price manipulation discusses.
- Hidden size. Some venues allow orders that show only part of their size, so the displayed amount may understate what is really there.
- Off-book trading. Trades can occur on other venues, in private deals or in derivatives markets, none of which appear in one exchange’s book.
- Speed. Automated traders update quotes in fractions of a second. By the time you read a level, it may have changed.
Books differ between venues
Each exchange has its own book, so the same pair can look quite different on different platforms. That is a main reason the same coin shows slightly different prices across venues. Aggregators combine information from several books, but any single book represents only that marketplace’s participants. Decentralized platforms based on pools have no book at all, as described in the article on automated market makers.
Practical uses
Reading a book is mostly about understanding the cost and risk of a particular trade.
- Check the spread and the size at the best prices before a market order.
- Estimate how far a trade of your size would walk through the levels.
- Place limit orders with a sense of where the queue is, since orders at the front of a level fill first.
- Notice when the book is unusually thin, when price jumps are more likely.
Cryptocurrency prices are volatile, and no pattern in an order book guarantees an outcome. This article is general education and not financial, tax or legal advice.