Limit order book
Family II · Orders
Not to be confused with limit order, stop limit order, sell limit order.
Limit order book is the central matching mechanism of most modern exchanges and electronic venues: a real-time ledger of every unfilled limit order, grouped by price and ranked by time of arrival. It is not a chart or an indicator; it is the order flow itself, and it determines which trades can execute at any moment. The best bid and best offer at the top of the book define the visible spread.
Structure of the book
A limit order book has two sides. The bid side holds buy limit orders; the ask (or offer) side holds sell limit orders. Each side is sorted by price: bids from highest to lowest, asks from lowest to highest. The highest bid and lowest ask form the inside market or top of book.
At each price level, orders are queued by time priority: the earliest order at a given price is filled first. Aggregate size at a level is the sum of all orders resting there. Depth beyond the top levels is often called market depth.
Matching rules vary by venue. Some books display full depth, others show only the top few levels, and some are entirely dark. Price-time priority is common but not universal; pro-rata and size-priority schemes also exist.
Worked example
A simplified book for a stock with a tick size of 0.01:
The incoming order consumes the 800 shares resting at 25.12, then the remaining 400 shares execute against the next ask level at 25.13. The book updates immediately, and the new best ask becomes the next resting sell order.
What the book does and does not show
The book shows resting liquidity, not intentions. Hidden orders, iceberg orders and reserve size may not appear in the displayed depth. A large bid can be cancelled before execution, and a thin book can still absorb size if new orders arrive quickly.
Because of this, depth is a snapshot, not a guarantee. Traders use it to gauge supply and demand at specific prices, but execution depends on the venue's matching rules and the behaviour of other participants.
Often confused with
- limit order
- A limit order is a single instruction to buy or sell at a specified price or better; the limit order book is the venue-wide collection of all such resting orders. The visible sign is that a limit order is one line on a ticket, while the book is the aggregated depth display.
- stop limit order
- A stop limit order is dormant until a trigger price is reached, then becomes a limit order; it does not rest in the book before triggering. The visible sign is that a stop limit order shows a trigger price in addition to a limit price, whereas book entries show only price and size.
- sell limit order
- A sell limit order is one offer to sell at a minimum price; the limit order book contains all sell limit orders (and all buy limit orders) across many participants. The visible sign is that a sell limit order appears as a single order, while the book's ask side aggregates many orders at each price level.