What are order books?

TL;DR

An order book is a detailed list of an asset’s buy and sell activities on a trading platform like a cryptocurrency exchange or a stock exchange. Organized and sorted by price level, these order books are used by buyers and sellers to execute trades and as reference guides for relevant market trading information.

An order book is an electronic list of buy and sell offers of a certain asset such as a stock or cryptocurrency. Order books are used to match a seller’s asking price with a buyer’s offer in order to execute a successful trade.

Traditionally, traders or brokers had to gather on a trading floor shouting out their offers and taking note of others’ prices to arrive at the best deal possible. Nowadays, order books are used to conduct trades electronically, and are a standard feature of an exchange’s user interface. An order book automatically matches offers a lot faster and more efficiently than a room full of people. 

Order books are also important tools for monitoring the movement and performance of a certain asset on the market as they are constantly updated in real time to display relevant and accurate information for traders and investors.

On PDAX, you can view the order book on the “Advanced” trading page of the web exchange or mobile app as soon as you set up an account.   

Within an order book, a user will be presented with various data and information for a particular trading pair. A trading pair consists of the “base”–which is the asset you are buying or selling, paired with a “quote” which sets the price for the base asset. For example, if you want to buy Ethereum (ETH) using Philippine pesos, then you should check out the order book “ETH/PHP”.

The layout of an order book can vary from exchange to exchange but it will always present the following details:

• Buy orders - the list of all the open bid offers, the amount they wish to buy and at what price they are willing to buy it. 
• Sell orders - the list of all the open selling offers, the amount they are selling and at what price they are selling it for.
• Transaction history - the list of all trades that have been successfully carried out.

An order book for ETH/PHP may look something like this:

Order books are typically arranged with the highest sell offers at the very top of the list, and the lowest buy order at the very bottom. In the middle, you can find the current buy and sell orders which are the closest to matching with each other. Here, we can see that a sell order for 1 ETH at PHP 91,000 has matched with a buyer willing to buy it for the exact price and amount. The order book’s algorithm will then automatically execute that trade for both users.

Order books are dynamic lists which means that they are constantly being updated as trades get executed and as new buyers and sellers join in with their offers. Traders who want to execute a trade right away might place an order near the current market price where the buy and sell orders are meeting. 

However, trades don’t always have to be exact matches in order for them to be executed. For example, there may be users who may be selling off a large amount of ETH. In that case, the exchange can execute a transaction that involves multiple buy orders from a number of users in order to meet the requirements of the large sell order.

Inversely, a trader who wants to buy a large quantity of ETH may be matched with multiple sellers with the same asking price in order to meet the quantities of the sell order. 

There are different kinds of orders that one can make on various crypto exchanges. For the purposes of this article, we will be discussing the two available kinds of orders that users can make on the PDAX platform:

A limit order is when the trader inputs a certain price limit along with the quantity of tokens that they want to either buy or sell for that particular order. The biggest advantage of a limit order is that traders are able to buy or sell their tokens at the price range that they are comfortable with and not necessarily at the current price which the market is dictating.

However, it can sometimes take a while for the market prices to actually reach the limits that they have set for that particular order. So unless you are not in a hurry, this may not be the most viable method for traders or investors who are looking to execute orders quickly. 

Additionally, limit orders are not always guaranteed for processing as exchanges typically adopt a first-in, first-out (FIFO) system. This means that orders that are placed first will take priority and the processing of limit orders will largely depend on the volume of orders that are currently on the exchange.

A market order is a kind of buy or sell order that you can execute immediately because you are automatically buying or selling into the current market price. With this kind of order, you only have to indicate the quantity of tokens that you want to sell and then the order book will assign the current market value for you.

The main advantage of executing a market order is the instantaneous nature of the transaction. You will be able to get a viable match for your order almost immediately, and this is most advantageous for investors or traders who might be in a rush to buy or sell their crypto.

More than anything, an order book is the most basic tool and important reference guide for the beginner trader or investor to get a feel for market sentiments as they unfold in real time. Just keep in mind that orders are typically subject to the terms and conditions of an exchange so always review an exchange’s terms and conditions before placing orders. And with enough use and experience, one can develop better-informed investment strategies simply based on how other players on the exchange are behaving.

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.