The order book: what it shows and what it does not

The order book is a snapshot of the limit orders that participants have agreed to show the market in a particular trading mode. It tells you the best bid and the best offer, the distance between them and the volumes quoted at each price level. It does not tell you anything about intentions, the hidden parts of iceberg orders, stop orders, orders still sitting inside a broker's algorithm, or over-the-counter arrangements. The order book answers the question "at what price is there a willingness to trade right now", not the question "where will the price go".

What physically sits in the order book

The exchange keeps a two-sided book: buy orders are ranked by descending price, sell orders by ascending price. The top rows on each side form the best price, and the gap between them is the spread. A trade occurs at the instant when someone's order crosses the opposite side on price.

An important detail that beginners miss: the terminal almost always shows volume aggregated by price. A large order from a market maker and a scattering of small orders from retail investors at the same level look indistinguishable. In its aggregated form the exchange order book reveals neither the number of participants nor who exactly is standing in the queue; anonymity here is built into the architecture, it is not a setting.

The queue: price takes priority, then time

Execution priority is two-tier. The better price is served earlier; at an equal price, the order that joined the queue earliest is executed ahead of the rest. This has practical consequences:

• moving an order "slightly better" on price means jumping the entire queue at that level;
• changing the size of an order usually means losing your place in the queue and going to the back;
• an order sitting deep in the book can stand there for the whole session and never be filled at all, even though the price "touched" its level.

Spread and depth: what exactly you are paying for

The spread is the price of immediacy. It shows how much it costs to exit a position with a market order at that moment. Depth is the resilience of the price to volume: how quickly an order "eats through" the levels, moving further and further from the best price. These are different properties, and they diverge: the spread can be narrow while depth is thin, and then an order of a size that is normal for you is filled at an average price noticeably worse than the top row. The difference between the expected and the actual execution price is slippage.

You can only check this on a specific security. Open the page for {{instrument:SBER}} and compare its picture with any issue from the OFZ section or with second- and third-tier names in the list of stocks: the structure of the book differs fundamentally from instrument to instrument, and where orders are scarce, the illiquidity discount comes into play.

What is not in the order book

• Stop orders. They are held on the broker's side or in the exchange's system as conditional orders and enter the book only after the trigger fires. That is why a cascade of stops cannot be seen in the book in advance; it is seen only once it has been executed.
• Hidden volumes. An iceberg order shows only the part above the waterline; the rest is fed in portions as the order is filled.
• History. The book is the state as of now. What has been executed is visible in the trade tape, not in the order book, and confusing them is a common mistake.
• Over-the-counter turnover and large blocks. A deal executed as a negotiated trade or off the exchange does not enter the book of the main trading mode.
• The reason. The order book contains neither financial statements nor corporate events. For those, see issuer reports and the events calendar.

When the order book behaves differently

In the opening and closing auctions, orders accumulate but there are no trades: the price is set by the maximum executable volume, and the usual "best price against best price" reading does not work during this period. If the price deviates sharply, the exchange may move the instrument into a discrete auction, and for that time the continuous book ceases to exist as a mechanism.

A separate case is securities where the density of orders is sustained not by natural demand but by a contractual obligation: who does this and on what terms is covered in the article on the market maker. If that support stops, the book empties faster than the investor has time to notice, hence the liquidity risk of the issue.

How to use the order book before placing an order

Step 1: look not at the best price but at the volumes on the nearest levels, and compare them with the size of your own order. Step 2: estimate the average price at which the whole volume would be filled if you went in with a market order. Step 3: if there is not enough depth, choose a limit order and a willingness to wait, or split the volume. An algorithm that slices an order by time rather than by available liquidity is described in the piece on TWAP, and its limitation is a material one: evenness over time does not guarantee good execution in a thin book.

And the main limitation of the genre: the order book is a tool for execution, not for forecasting. It tells you how much a trade will cost now. How long it will take to exit a position without a noticeable impact on the price is a matter of the liquidity horizon, and that is measured on other data: the journal article on liquidity explains why liquidity is noticed only when it runs out.