Order Books: A Tutorial

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency and metaverse ecosystems. 

What is an Example of an Order Book?

Below, is a screenshot of an order book for the BTC/USD trading pair, designating the Buyer’s Side on the left and the Seller’s Side on the right. 

Bitfinex BTC/SUD Order Book (source: Bitfinex.com) (annotated)

The Buyer’s Side identifies buy orders (investors who want to purchase BTC for USD) and the Seller’s Side identifies sell orders (investors who want to sell their BTC for USD). Transactions take place whenever a buy order finds a seller, or a sell order finds a buyer.

What are the Order Book Column Headings?

Starting on the left-hand side of the book, a number of column headings are provided, including the headings of Count, Amount, Total, and Price. The right-hand side of the book includes similar column headings. 

Count refers to the number of offers that are being offered at a given price level of the asset. Count is also referred to as market depth. For example, reading along the first row in the buy/bid side of this book, the count “433” represents that there are 433 different offers that are asking to purchase BTC at the price of $7,500. 

Amount is the second column. Starting with the first bid-offer listed on the first line on the buy-side of the order book, an amount of 778 units of this particular asset (BTC) is being offered to be purchased at a price of $7,500 USD.

Similarly, on the seller's side of this book, there is an Amount of 518 units of BTC that is being “asked” to be sold at $7,600 USD. The remainder of the order book is filled with units being offered to be bought or sold at other varying price levels as noted.

The “Total” columns are the cumulative amounts of the specific security being offered to be purchased or sold at different prices. From the buyer's side, the Total column represents the total number of offers that are pending for this given asset at the noted price level. For example, at a price level of $7,100, the amount of BTC offered to be purchased is 5,433 coins.

This amount is derived by adding the previous bidding offer of 4,693 coins to the current offer of 740 coins (4,693 + 740 = 5,433). Investors use these Total columns to monitor whether the buyers or sellers for BTC have stronger momentum during this particular period of time. For example, if the total buy orders are greater than the total sell orders, such a situation is a bullish market indicator where buyers have more momentum. Here, the BTC price is likely to increase.

Alternatively, if the Total sell orders are greater than the total buy orders, such a situation is a bearish indicator where sellers have more momentum. Therefore, the BTC price is likely to decrease.

In the order book reproduced above, since the total BTC purchase offers (14,691) is more than double the total BTC sell offers (7,340), this is a strong bullish indication.

What is the Bid-Ask Spread?

A bid-ask spread is a difference between the highest bid price and the lowest sell price. So, in our example order book above, the bid-ask spread is $7,600 - $7,500, or $100. The bid-ask spread is an important order book metric as it is an indicator of BTC’s supply and demand strength. It is one measure of the liquidity in the market and of the size of the transaction cost.

When the bid-ask spread is narrow, it means that there is a fair amount of liquidity in this particular asset. Having a fair amount of liquidity is one market indication that it is easy to buy or sell the security at a competitive price, especially if the order size is large. Alternatively, if the bid-ask spread is large, it may be difficult and expensive to trade the security.

How to Interpret Aspects of an Order Book?

Buyer’s Side

The Buyer’s Side of an order book can have pricing levels that create what is referred to as a buy wall where there are a large number of buy orders (demand) at a specific price level. In this situation, buy walls have an effect on the price of an asset because if the order cannot be filled at this particular price, buy orders at a lower bid price also cannot be filled since the higher bid price must be filled first.

The price will not be able to drop any further since the orders below the buy wall cannot be executed until the larger order is fulfilled. This wall and the respective pricing level will therefore act as a support level. 

Bitfinex BTC/USD Order Book Buy Wall (source: Bitfinex.com)

As illustrated in the Buyer’s Side reproduced above, there are 1,215 buy orders making up a cumulative large order of 1,676 BTC. These buyers are waiting for their orders to be filled at a price level of $7,200. Such a large order demonstrates high demand at this pricing level. Since this cumulative order is rather large compared to what is being offered (low supply), the orders residing below this bid price of $7,200 cannot be filled until this cumulative order of 1,676 BTC is filled.

Therefore, this cumulative order acts as a “buy wall.” In this case, the buy wall is helping the $7,200 price level act as a price support level for BTC’s price. At this level, usually the demand picks up and prevents BTC’s price from falling further as the buyers find the price attractive enough to buy and sellers are less willing to sell. Indeed, $7,200 has been a long-term key BTC price support level.

Seller’s Side

A large collection of sell orders (supply) at a specific price level generates a sell wall. If there is a large collection of sell orders unlikely to be filled due to lack of demand at a certain asset price, then sell orders at a higher price cannot be executed. This makes this particular price level a resistance level. 

Bitfinex BTC/USD Order Book Sell Side (source: Bitfinex.com)

As illustrated in the Seller’s Side reproduced above, there are 231 sell orders making up a cumulative large order of 1,161 BTC. So, for the above-identified entry on the order book sell side, this entry can be represented as the owner of these 1,161 BTC is asking someone to buy these units at $8,000.

This rather large order demonstrates high demand at this pricing level. Since this cumulative order is large compared to what is being offered (low supply), the orders positioned below this ask price of $8,000 cannot be filled until this cumulative order of 1,161 BTC is filled.

Therefore, this cumulative order acts as a “sell wall.” In this case, the sell wall is helping the $8,000 price level act as a resistance level for BTC’s price. At this level, the demand typically decreases and prevents BTC’s price from rising up further as the sellers find the price attractive enough to sell and buyers are less willing to buy.

And indeed, $8,000 has been a long-term key BTC price resistance level.

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