Have you heard the term order book? It means a record of all orders to buy a particular thing. An Order Book in the Security Market is similar – an electronic record of all trades made for a specific bond or stock, derivatives, options, futures, or cryptocurrency.
Order books in the security market keep detailed records of all trades being placed, including the price, the buyer or seller, the number of trades open, the market depth, the stop-loss limit, and other information regarding the purchase and sale of any specific security. As a result, order books help traders and investors make valuable decisions and improve market transparency.
5 things you should know about the order book in the security market
- An order book is a list of orders for buying/selling instruments in the Security Market, and all order details are recorded in it.
All financial instrument trades to be made in the security market are recorded in the Order Book. It records the volume or quantity of traded shares and the price at which they are sold. Whether they are market price transactions or transactions set to be executed when the market hits a specific price. The order book also gives details about the people trading these securities. Investors must pay a sum to access the order books maintained to analyze the data and gain valuable insights.
2. Every exchange uses order books to list the orders for different assets like stocks, bonds, and currencies, including cryptocurrency.
Earlier, Order books were used only to record stock transactions, but now, having seen their usefulness and the valuable knowledge they gather, almost every exchange maintains order books. Order books record buy and sell orders and order history for stocks, bonds, currency markets, etc.
3. Orders can be market orders, limit orders, or stop loss orders executed at market price or a specific price in the security market.
Order Books record all the orders as they are placed and whenever they are executed. Market Orders are orders that are done in real-time at the market prices. Limit buy or sell orders placed to be completed at a specific price – if and when the market hits the specified price, the order is executed. Stop-loss orders are orders placed to stop an investor from making a loss in a volatile market scenario. In this case, the order is executed once the market hits the stop loss price.
4. Order Books also record the order’s status in the security market.
The order status may be requested, queued, ordered, executed, expired, canceled, or rejected. It records all the order stages until it is completed. For example, when the investor or trader starts the process of making a trade:
- Requested – If the Order is placed when the market is closed, then the order is said to be requested.
- Queued order – Once the order is sent to the exchange, the order is said to be Queued.
- Ordered – The exchange sends an acknowledgment of receipt of the order.
- Executed – When the trade order is completed, it is said to be executed.
While these are the most commonly used, orders may sometimes also be:
- Part-executed – When the order has been partly executed or completed
- Rejected – When the exchange has denied the order and will not get executed.
- Canceled – When the order has been canceled.
- Expired – When orders that have not been executed until the end of the trading hours expire.
5. The order book gets real-time updates at the time of receiving as well as executing orders.
The order book is updated in real-time and continuous updates show the total volume of the orders for any specific security, both buy and sell. It informs the user about the retail investors and institutional investors interested in trading the particular security. It is why an order book is also called a continuous book.
Order Books are an excellent tool almost all stock exchanges use to promote transparency in dealings. The security market order book also allows traders and other investors to analyze and understand the market trends to make the most accurate and informed trading or investing decisions.
It provides the investors valuable insight into the security trade by giving the details such as bid-ask spread, market depth, order imbalances, etc. In addition, the order book in the security market provides the ability to sort through actual trades and market manipulations.
What is Market Depth?
Market Depth is the ability of the market to execute relatively large market orders without any drastic change in the security price. This is based on the number of open buy and sell orders for a particular security.
What are the advantages of learning to read an order book?
The advantage of learning to read an order book is that an investor can identify and analyze the trades being made, resistance to price or support to the cost of the security, the market depth of security, intentions of the market concerning that security, and make sound investment decisions.
How does the National Stock Exchange (NSE) maintain its order book?
As and when valid Bids are received by the system, they are first numbered, time-stamped, and stored in the book. Each offer has a distinctive offer number and a unique time stamp. All the Offers placed in the system will remain outstanding till the last day of the book-building process. Users can cancel all the bids placed in the system from the start till the last day of the Book-Building process.