How orders affect the order book

Okay, so to understand better
how the order book works and how exchanges work, let’s look
at a couple more example orders. For brevity I’m leaving
out the symbol IBM. This is all about IBM, so
just keep that in mind. Okay, so a market order comes
in to buy 100 shares at market. So again, we see that there’s 1,000
shares that people are willing to sell. And the exchange has to give
the best price to the client, and so we give the client 100
shares at this price. So what happens, the order comes in. 100 shares go away. And now the order book
has changed just so that there’s 900 shares available
here now instead of 1,000. And the execution price is $100. Let’s consider now a limit order. Someone wants to buy again 100
shares at a limit of 100.02. So, again looking at the order book,
again, we can satisfy that order and,
again, at $100. So we’re saying that we want
to pay no more then $100.02. So again, we can execute at 100, and now this goes down to 800 shares
instead of 900 being available. And the execution price for
this transaction again, is $100. And note also that that’s less
than that limit price of $100.02. Let’s look now at one last order, a market order,
where someone wants to sell 175 shares. So that comes in. And we have 100 shares available
at 99.95, so those get sold. And there’s none left
there at that price. So a 100 shares get executed at 99.95. So to get this 75 more shares,
we need to go deeper into the book. So we’ll take these 50, 0 left there. We still need 25 more shares
to meet this order for 175. So we go even deeper into the book and
take some of these. So after all these transactions, the order book has been
changed quite substantially. And this client gets
a 100 shares at 99.95, 50 at 99.90, and 25 at 99.05. So all together, there’s some average
price at which this was executed for that client. Note now that as time has gone on, the
executed prices have been decreasing. Clearly we’re seeing
that’s a consequence of there’s much more sell
pressure than buy pressure. So that’s how the order book works and
how exchanges use order books to facilitate
transactions between their clients. This is what an order book
looks like in real life. Here in the middle, we have prices. And on either side here,
we see the order sizes. We’re seeing here, sell orders and
how large they are, and on this other side, buy orders and
how large they are. And the prices that they’re being
executed here are in the middle. And as you can see,
it’s changing dynamically and rapidly as trades are executed. Here we see a price chart showing
how the prices is going up and down as these trades are being executed. So that’s a live order book. This is using the trading
platform called Think or Swim.

5 thoughts on “How orders affect the order book”

  1. Hi professor, for order SELL 175 MARKET, isn't the case where lowest BID be executed from the order book.
    So sequence of order executed: 1. BID 99.85 50 2. BID 99.90 50 3. BID 99.95 75

    Please confirm the above doubt

  2. I don't believe limits are matched with limits. I do believe all limit buy n sells are matched with market buy n sells. The limits go on the book in order received as well. Besides that, that's a DOM not an order book. An order book lists all limit orders along with their specific market makers. An interesting thing to note though is that price goes down as the limit bids are filled and price goes up as the limit asks are filled. And we wonder why most traders loose. 🙂

  3. in case of Market SELL in the US Best Price Execution Rule may route the order to other exchanges if orders with best buy price are available there to prevent walking down the order book by market order.

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