The Order Book: Where Unfilled Buy and Sell Orders Wait

An order book is the list of orders that have reached a venue and have not been filled, held in two halves and sorted by price with the best on each side at the top. Buying interest sits on one side and selling interest on the other, and the two never touch. Any overlap would already have traded, so the best buying price always sits below the best selling price.

Start with the small fact that makes the whole thing make sense. An order that names a price it is willing to deal at cannot be filled until somebody else agrees to that price. Nobody may agree in the next second, or the next hour, or at all. So the order has to wait somewhere, and the book is that somewhere. The book is a waiting room, and the only tenants are orders that have not got what they came for.

The need to wait decides everything else. Waiting decides what is in the book, why the two halves never overlap, what the widely quoted top of the book actually is, and, most usefully of all, the four questions the book cannot answer however closely it is stared at.

Everything in an order book is unfinished business, and that is exactly why a book describes the present so well and says nothing whatsoever about the future.

What is actually sitting inside an order book?

Two sorted lists, and that is close to the whole of it. One list holds the orders that want to buy. The other holds the orders that want to sell. Each list is sorted by price, and each puts its own best price at the top: the highest price anybody is currently willing to pay heads the buying list, and the lowest price anybody is currently willing to accept heads the selling list. A venueThe place where orders from different parties are brought together and matched against each other. Which kinds of venue exist, and how they differ, is covered separately. keeps this list, publishes some part of it, and matches lines against each other as they agree.

Here is the everyday version, and it is closer than it looks. Picture a noticeboard outside a village hall on the morning of a rice sale. One column of slips says what people are willing to pay and how much they want at that price. The other column says what people are willing to accept and how much they have. The moment two slips agree, somebody takes both down and the sale happens in the corner. Agreements come off the board, so the board never shows a single one, and everything still pinned to it is by definition something nobody has agreed to yet.

So an order that was filled two minutes ago is not in the book. The order left the instant it was filled. An order somebody is still thinking about sending has not arrived, so it is not in the book either. The remaining population is narrow and precise: orders that turned up, named a price, and have not yet found anybody to agree with. Below is one such book, drawn in full.

What does one line of the book contain?

Less than almost everybody assumes, and the shortfall is the most valuable thing to know about a book. A line carries three things. A line carries a side, meaning buying or selling. A line carries a price, meaning the price that order is willing to deal at. And a line carries an amount of interest at that price. There is nothing else on any row, and the drawing above shows nothing else on any row.

A line does not carry a name. The book records that somebody is willing to buy Rs 5,00,000/- worth at Rs 100.00/-. The book does not record who that somebody is, whether it is one party or forty, why they want to, what they know, what else they hold, or whether they will still be there a moment later. Readers routinely assume the opposite, partly because the document looks so much like a register and partly because a screen full of numbers feels as though it must be carrying more than three facts per row.

The missing name is deliberate rather than accidental. Take it seriously. If a book carried names, the largest participants could not use it without announcing themselves, and everybody else would be reading the participants rather than the prices. The document is useful precisely because it is anonymous. The absence of a name is a design feature of the book and not a gap in it.

Why do the two sides never touch?

One sentence answers the question, and the answer needs no theory at all. Suppose the best buying price in some book were Rs 100.20/- and the best selling price were also Rs 100.20/-. The two orders agree with each other. One party is willing to pay exactly the price the other is willing to accept. So they would have been matched, and once matched they leave. The book is made of orders that have not been matched, so the two cannot be sitting in it.

Now suppose the best buying price were higher still, say Rs 100.30/- against a best selling price of Rs 100.20/-. The buyer is willing to pay more than the seller is asking. The two orders agree even more comfortably, so they are matched even faster, and they leave even sooner. Overlapping is the definition of agreeing, and agreeing is what removes both orders from the book. No buying order and selling order that overlap in price can both survive there.

A gap between the two best prices is therefore not a curiosity to be explained, it is the definition of what is left over. The book that can be seen is always and only the book of orders that have failed to agree with anybody so far. Read that way, the gap stops being mysterious. A book with no gap would be far stranger. No gap at all would mean the venue was holding two orders that wanted the same deal and had not put them together.

The everyday version: a hall where the pinned slips are the ones nobody has taken. If a slip offering to pay two thousand rupees a sack and a slip offering to sell at two thousand rupees a sack were both still pinned up at noon, the conclusion to draw would not be something interesting about the rice market. The conclusion would be that whoever runs the board has stopped doing the job.

What is the top of the book, and how wide is the gap?

The top of the book is a short phrase for two prices: the best buying price and the best selling price at a given instant. On the illustrated book those are Rs 100.00/- and Rs 100.20/-. Anybody who wanted to deal straight away, without waiting for anything, would meet one of those two. Somebody wanting to sell immediately would meet the buying top of Rs 100.00/-. Somebody wanting to buy immediately would meet the selling top of Rs 100.20/-. The two tops are the answer to the question, what is on offer right now.

The gap between them is one subtraction, and it is worth doing rather than reading. Rs 100.20/- less Rs 100.00/- is Rs 0.20/-. Turning that into a percentage is one division, and the division needs a base named in the same breath. Rs 0.20/- over the best buying price of Rs 100.00/- is 0.0020, or 0.20 per cent of the best buying price. The gap is known as the spreadThe distance between the best buying price and the best selling price, read as a charge somebody dealing immediately pays without ever seeing an invoice for it. Covered separately. and reads as a cost on a trade. The cost itself is covered separately.

The same Rs 0.20/- read against a different price is a different number, so a percentage without its base is unusable. Divided by the best selling price of Rs 100.20/- instead, the same twenty paise gives roughly 0.1996 per cent, which rounds and reports differently from 0.20 per cent. Nothing is wrong with either division. Printing one of the two answers with no base beside it would be wrong. A reader cannot then tell which division produced it.

The midpoint is the third thing readers want and the easiest to compute. Add the two tops and halve them: Rs 100.00/- plus Rs 100.20/- is Rs 200.20/-, and half of that is Rs 100.10/-. The midpoint sits exactly between the two, twenty paise from neither and ten paise from both. The midpoint is a convenient reference point and nothing more. No order is sitting at Rs 100.10/-, nobody has offered to deal there, and the book contains no line at that price at all.

What is sitting below the top?

Everything that is not the best price on its side, and readers usually call it depth. On the illustrated book the buying side has Rs 5,00,000/- of interest waiting at Rs 100.00/-, Rs 3,00,000/- at Rs 99.90/- and Rs 2,00,000/- at Rs 99.80/-, giving Rs 10,00,000/- of buying interest in all. The selling side has Rs 4,00,000/- at Rs 100.20/-, Rs 6,00,000/- at Rs 100.30/- and Rs 1,00,000/- at Rs 100.40/-, adding to Rs 11,00,000/-.

The table describes how much interest is sitting at each price at this instant, and it describes nothing else. The description stops there. The effect of a large order arriving now, what any price would do afterwards, and whether the lines would still be there when the order got to them are all a different subject, covered separately.

The unit matters too. Interest sits in rupees rather than as a count of anything, and the reason is worth one sentence: a count has to attach to a named instrument, and the illustrated book names no instrument at all. Rupees of interest is what a book drawn this way can carry, so rupees of interest is what it prints.

What does an order book refuse to tell?

Four things, and every one of them is a thing readers reach for first. Taken one at a time, the restraint they add up to is the most useful habit a reader of books can build.

The book does not say who. The missing name arrived with what a single line carries, and the other three refusals follow from the same anonymity. A line is a side, a price and an amount. Whether the Rs 6,00,000/- waiting at Rs 100.30/- belongs to one party or to sixty is not on the document and is not derivable from it.

The book does not say whether the orders will stay. An unfilled order can be taken back by whoever placed it, without any trade happening at all. Every single line in the book is therefore conditional on somebody continuing to want it there. The book has no way of distinguishing a line that has sat patiently all morning from one that arrived a second ago and will be gone a second from now.

The book does not say what is coming. An order that has not reached the venue is not in the book, by definition. A book looks so complete that this refusal, the flattest of the four, is the one people find hardest to hold on to. A book is complete about what has arrived. A book is silent about everything that has not, and what has not arrived is unbounded.

The book does not say what the price will do. Silence about the future is not a limitation of this particular document, it is the document's whole nature. A book is a photograph of unfinished business, and a photograph of the present, however detailed, is not information about the future. Here the restraint becomes teaching rather than caution: a reader who genuinely accepts these four refusals is better equipped than one who has memorised any amount of vocabulary about depth.

Which orders wait in the book, and which never appear at all?

An order that names a price it is willing to deal at has said, in effect, these are my terms and I will wait until somebody agrees to them. Waiting is the entire purpose of the book. The order becomes a line and sits there until it is matched or taken back. Every row in the illustration above is one of these.

An order that names no price has said something different. The order has said, deal for me now against whatever is at the top. There is nothing to wait for, so there is nothing to record. The order arrives, meets whatever the top of the book is offering, and is done. Such an order never becomes a line, and no amount of watching the book will show that it happened.

The consequence for reading any book is sharp and it is easy to miss. Everything visible is interest that was willing to wait. Interest willing to wait is a genuine population and a narrow one. The impatient are structurally absent from the document, so the visible population is not everybody who is interested in dealing. A book is a picture of patience, not a census of interest.

Household version: a shop keeps a list of customers who have asked to be told when a particular sack of rice comes in. The list is real and useful. Anybody willing to walk in and buy whatever is on the shelf never asked to be put on the list, so the list is not a list of everybody who might buy rice. Reading the waiting list as a measure of total demand would be an honest mistake and a large one.

Who is standing in the middle inside an order book?

One question runs through every part of market plumbing: who stands between whom, and what breaks if they step out. Asked of the order book, the answer is startling the first time. The book is a record rather than a party, so nobody is standing in the middle inside it. It cannot buy anything and it cannot sell anything. The book owes nothing to anybody and nobody owes it a rupee. A sorted list has no balance sheet.

The two parties that genuinely do stand in the middle sit on either side of the book in time, and that ordering is what makes the question confusing. Before the book, a broker stood between the client and the venue and carried the order in. The client cannot reach the venue directly, and a trading memberA party the venue has admitted to its own rules and permitted to send orders into it. What it takes to be admitted is set by the authority named below. is the only kind of party a venue deals with. Without that party the order never becomes a line at all.

After the book, the instant two lines agree with each other, the clearing corporation of Kaveri Stock Exchange Limited steps into the middle and becomes the party each side faces. The buying client stops facing an unknown selling client and starts facing the clearing corporation. The selling client stops being owed by an unknown buying client and starts being owed by the clearing corporation. The clearing corporation is a separate company from Kaveri Stock Exchange Limited itself, and it appears only after the book has finished with the two lines. Which counterpartyThe party on the other end of a deal, the one who owes the client or is owed by the client once the deal is done. Who that turns out to be after a match is covered separately. each side ends up facing is therefore decided outside the book entirely.

So a reader who thinks of the book as a counterparty has mixed up a list with a company. Inside the book there is a queue and no middle. Remove the book and orders have nowhere to wait, and that is a real loss. The book never held an obligation in the first place, so nothing about who owes whom changes.

How does somebody with a book on their screen actually use it?

Who sets the conditions around what a book shows?

Four of the conditions around a book are not the venue's to state either. An authority sets them and revises them, so a figure printed beside them would become wrong rather than merely old. The queueThe line two waiting orders stand in when neither has been matched yet, and the rule deciding which of them is served first. That rule is set by the authority named in this block. rule is the sharpest example: something has to decide which of two waiting orders is served first, and that something has to be written down before either order arrives.

A rule deciding which of two orders is served first must be fixed in advance for exactly the reason the order in which losses are met when a member fails must be fixed in advance. Nobody could agree either one in the moment. In the moment, every party would argue for whichever ordering favours them, and the argument would be perfectly sincere on all sides. The protection in both cases is that the sequence was settled while nobody knew whose turn it would be. The same idea sits in two very different places, and meeting it twice makes it much harder to forget.

So the rows below are drawn with the value column empty, and the authority printed inside the row where a value would otherwise sit. A sheet like this teaches which condition exists and where the answer lives, so it is genuinely useful while blank. Taken to the source in one sitting, it can be filled in.