Order Book: What It Is and How It Works

How an order book works

An order book has two sides:

• Bids: buy orders, sorted from the highest price down. The top one is the best bid.
• Asks (offers): sell orders, sorted from the lowest price up. The top one is the best ask.

The gap between the best bid and best ask is the spread. The amounts waiting at each price level make up the book's depth.

Trades happen when orders meet:

1. A limit order names a price. If it does not match immediately, it rests in the book and adds liquidity. Traders placing these are called makers.
2. A market order buys or sells immediately at the best available prices, consuming resting orders. Traders placing these are takers.
3. The exchange's matching engine pairs orders by price, then time: better prices go first, and at the same price the earliest order is filled first.

If a market order is larger than the amount available at the best price, it "walks the book" through several levels, and the average fill is worse than the price quoted. That difference is slippage. Other order types, such as stop orders, sit outside the visible book until their trigger price is reached.

How traders read an order book

• Liquidity: a tight spread and deep book mean large orders can trade with little price impact; a thin book means the price can move sharply on modest volume.
• Depth chart: many exchanges plot cumulative bids and asks as a two-sided chart, which shows where large orders cluster.
• Walls: a very large order at one price can act as a short-term floor or ceiling, although it can be cancelled at any time and is sometimes placed only to influence others ("spoofing").

Market makers provide much of the resting liquidity by continuously quoting both sides. The live order book for a pair appears on its trading page, for example the Bitcoin price page shows the spot market.

Order book vs automated market maker (AMM)

Centralized exchanges and some on-chain venues use order books. Many decentralized exchanges instead use an automated market maker: traders swap against a liquidity pool, and a formula sets the price from the pool's balances. AMMs are simpler to run on a blockchain and always quote a price, while order books let traders name exact prices and can be more efficient for large, active markets.