How an order book works: bids, asks and the spread
Every market price is the meeting point of two lists of orders. Reading those lists shows what a trade will cost before you place it.
Kivorent News desk, , 2 min read
What to know
- The order book lists the prices buyers are offering, called bids, and the prices sellers are asking, called asks.
- The gap between the best bid and the best ask is the spread. You pay it every time you trade at once.
- A market order takes whatever is in the book. A limit order sets your price and waits.
When an app shows one price for a stock, a futures contract or a prediction market, it is simplifying. There are always at least two prices: the most anyone will pay and the least anyone will accept. The order book is the list behind them.
What the book looks like
Here is a small book for something trading near $50.
| Bids, to buy | Size | Asks, to sell | Size |
|---|---|---|---|
| $49.98 | 300 | $50.02 | 200 |
| $49.97 | 500 | $50.03 | 400 |
| $49.95 | 1,000 | $50.05 | 800 |
- The best bid is $49.98, the highest price a buyer is offering.
- The best ask is $50.02, the lowest price a seller will take.
- The spread is the 4 cents between them.
A single quoted price is usually the last trade or the midpoint, $50.00 here.
The two basic orders
A market order means trade now at the best available price. If you buy 200 shares, you pay $50.02. You get speed and give up control of the price.
A limit order means trade only at your price or better. If you bid $49.99, your order joins the book as the new best bid and waits for a seller. You control the price and accept that the order may never fill.
Traders who post limit orders are supplying the book. Traders who send market orders are taking from it.
Why the spread is a cost
Buy at $50.02 and sell straight away at $49.98, and you lose 4 cents a share with the market unchanged. That is the price of trading immediately.
Heavily traded markets have spreads of a penny or less. Thinly traded ones can have spreads of several percent, so a position starts with a real loss the moment you open it.
Depth and slippage
Depth is how much is available at each price. In the book above, only 200 shares are offered at $50.02.
A market order to buy 1,000 shares would fill like this:
- 200 at $50.02
- 400 at $50.03
- 400 at $50.05
The average price is $50.036, higher than the quote you saw. That difference is slippage. Larger orders and thinner books mean more of it.
What the book tells you
- Spread width shows the cost of trading right now.
- Depth near the top shows how much you can trade before moving the price.
- Imbalance, with far more size on one side, can hint at short-term pressure. Orders can be cancelled in an instant, so treat it as a weak signal.
Habits that follow from this
- Check the spread before sending a market order, especially outside regular hours.
- Use limit orders in thin markets.
- Split a large order into pieces if the top of the book is shallow.
- Count the spread as a cost of every round trip, along with fees.
Prediction markets run on the same mechanism. See how prediction market prices work.
This article is general information. It is not investment advice, and trading involves the risk of losing money.
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