Order Book

Anyone who wants to buy or sell a share on the stock exchange sends an order to the trading venue. This order states which share is involved, how many units are to be traded, and often also the maximum price to be paid or the minimum price demanded. All these orders are collected and kept in a list: the order book. On one side are the buy orders, on the other the sell orders, each sorted by price. If a buy order and a sell order match in price, a trade takes place and both disappear from the list. The order book is therefore not a look back at past trades, but a snapshot of what is currently wanted.

What the price actually shows

The price of a share is not set by any authority. It arises exactly where supply and demand meet in the order book. The price you see in an app is usually the price of the most recently executed trade. It is therefore a result of the order book, not its cause.

It is also important how densely the book is filled. If many orders lie close together, this is called high liquidity: large amounts can be traded without moving the price much. If the book is thin, even a medium-sized order is enough to shift the price noticeably. This is precisely why small, rarely traded shares often fluctuate more sharply than well-known blue-chip stocks.

For professionals, the order book is therefore both a source of information and a risk at the same time. Anyone who wants to sell a very large position reveals their intention as soon as the order is visible in the book. Other market participants can react to this and move the price in their favor beforehand.

Two sides, one spread

At the top of the buy side is the highest bid, called the bid price or simply bid. At the top of the sell side is the lowest ask, called the ask price or simply ask. Between the two lies a gap known as the spread. For a heavily traded share this is often only a few cents; for an exotic security it can amount to several percent.

New orders are sorted according to two rules. First, price counts: whoever offers more moves further up. At the same price, time counts: whoever arrived earlier is served first. This principle is called price-time priority and works like a queue with a right-of-way rule.

Two types of orders need to be distinguished. A limit order names a price limit and waits in the book until someone matches it. A market order names no price and is executed immediately against the best available offers. Limit orders thus fill the book, market orders empty it. A common misconception: a market order guarantees execution, but never a specific price.

From floor trading to milliseconds

In the past, traders stood in a hall and shouted prices at each other. Today the order book is a database on a server, for example at Xetra in Frankfurt. It processes changes on the scale of millionths of a second. In your broker app you usually only see the tip of this: the last price along with bid and ask.

This very flood of data has meanwhile become a field for software and AI. Algorithms in high-frequency trading read changes in the order book and derive assumptions about the next price movement from them. Machine learning methods are trained to recognize patterns in millions of such snapshots. Whether this works reliably is disputed, since every participant changes the book itself through their own actions.

The term is also found in cryptocurrencies. Trading venues like Binance display their order book publicly, often as a colored list with green buy offers and red sell offers. When news reports mention a thin order book, this simply means: offers are lacking, and the price can easily jump.