Order book definition

What is an order book?

An order book is a list of trades, either electronic or manual, that an exchange uses to record market interest in a specific security or financial instrument. Shares are normally listed in an order book by volume and by price level.

An order book is updated in real time because it’s an important indicator of the market depth – the amount of trades at any given moment – which is why they are sometimes called a ‘continuous book’.

Order books can also identify the buyers and sellers behind each individual exchange. However, some participants choose to operate in ‘dark pools’, which are batches of hidden trades away from the order book. This makes it difficult to know if the positions are taken being by individuals or institutions.

The opposite of trading in the order book of an exchange is trading off- book, which is when the trade price is agreed directly between two parties. The reporting process for off-book trading is not as rigid as trading directly into an order book and there are fewer time constraints.

What is an order book used for?

The order book of an exchange is used to help traders make better decisions, by enabling them to measure market sentiment at any given time.

The information that can be found in order books might not be that relevant to buy and hold investors, as intraday movements have little impact on their overall strategy. But for short-term traders, the improved transparency of the financial markets can help them to identify key trends and the balance, or imbalance, of buyers and sellers.

Order books can give a clear indication as to whether the bulls or bears are in charge of a market. For example, if there is an abundance of sell orders compared to buy orders, it could be taken as an indication that the market is due to decline amid selling pressure.

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