What Is an Order Book?

An order book is an electronic list of buy and sell orders for a specific security or financial instrument organized by price level. An order book lists the number of shares being bid or offered at each price point, or market depth. It also identifies the market participants behind the buy and sell orders, although some choose to remain anonymous.

Order books are used by almost every exchange for various assets including stocks, bonds, currencies, and even cryptocurrencies like Bitcoin. Although they generally contain the same information, the set up may be slightly different depending on the source. Buy and sell information may appear on the top and bottom, or on the left and right side of the screen.

These lists are not only useful for traders, but they also help improve market transparency because they provide information: how many shares area available, the price, and who wants to initiate the transaction.

[Important: The term order book can also be used to describe a log of orders a company receives from its customer base.]

Understanding Order Books

The order book helps traders make more informed trading decisions. They can see which brokerages are buying or selling the stock, and determine whether market action is being driven by retail investors or by institutions. The order book also shows order imbalances which may provide clues to a stock’s direction in the very short term. For instance, a massive imbalance of buy orders versus sell orders may indicate a move higher in the stock due to buying pressure.

The order book also helps pinpoint a stock’s potential support and resistance levels. A cluster of large buy orders at a specific price may indicate a level of support, while an abundance of sell orders at or near one price may suggest an area of resistance.

An order book is dynamic and constantly updated in real time throughout the day. Exchanges such as Nasdaq refer to it as the “continuous book.” Orders that specify execution only at market open or market are maintained separately. These are known as the “opening (order) book” and “closing (order) book” respectively.

At the Nasdaq market open, the opening book and continuous book are consolidated to create a single opening price. A similar process is followed at market close, when the closing book and continuous book are consolidated to generate a single closing price.

Information on Order Books

There are typically three parts to an order book: buy orders, sell orders, and order history. The book is often accompanied by a candlestick chart, which provides useful information about the current and past state of the market.

The buy orders contain all the information about the buyers in the market including all the bids, the amount they wish to purchase, and the ask price. Sell orders resemble buy orders. Market order histories show all the transactions that have taken place in the past.

The top of the book is where you'll find the highest bid and lowest ask prices. These point to the predominant market and price that need to get an order executed.

The order book, however, does not show “dark pools”—batches of hidden orders maintained by large players who do not want their trading intentions known to others. The presence of dark pools reduces the utility of the order book to some extent, since there is no way of knowing whether the orders shown on the book are representative of true supply and demand for the stock.

Key Takeaways

  • An order book is an electronic list of buy and sell orders for a security or other instrument organized by price level.
  • Order books are used by almost every exchange for various assets like stocks, bonds, currencies, and even cryptocurrencies.
  • These lists help improve market transparency as they provide information on price, availability, depth of trade, and who initiates transactions.
  • There are three parts to an order book: buy orders, sell orders, and order history.

Example of an Order Book

Order books continue to collate an increasing amount of information for traders for a fee. Nasdaq’s TotalView claims to provide more market information than any other book—displaying more than 20 times the liquidity of its legacy Level 2 market depth product.

While this extra information may not be very significant to the average investor, it may be useful to day traders and experienced market professionals who rely on the order book to make trading decisions.