What is 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.
BREAKING DOWN Order Book
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 market open on the Nasdaq, 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.
The order book information helps traders make better-informed trading decisions, since they can see which brokerages are buying or selling the stock and whether market action is being driven by retail investors or by institutions. The order book also shows order imbalances, which may provide clues to the stock’s direction in the very short term. A massive imbalance of buy orders compared to sell orders, for instance, may indicate a move higher in the stock due to buying pressure.
The order book is also useful in pinpointing a stock’s potential support and resistance levels. A cluster of large buy orders at a specific price, for example, may indicate a level of support, while an abundance of sell orders at or near one price may suggest an area of resistance.
Available Information on Order Books
The order book does not show “dark pools,” which are batches of hidden orders maintained by large players who do not want their trading intentions known to other traders. 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.
Order books continue to collate an increasing amount of information that is available to traders for a fee. Nasdaq’s TotalView, for example, claims to provide more market information than any other book, such as displaying more than 20 times the liquidity of its legacy Level 2 market depth product. While this added information may not be of much significance to the average buy-and-hold investor, it may be useful to day traders and experienced market professionals for whom the order book is one of the most critical inputs in formulating trading decisions.