Order Book Dynamics

The order book is the collection of pending buy and sell orders at different price levels. An order book contains all current buy and sell offers for a specific security. The best bid is the highest price a buyer is willing to pay. The spread is the difference between the best bid and best offer and represents the cost of immediate execution. The order book determines where liquidity is located. The order book aggregates buy and sell offers across price levels. Buyers and sellers submit offers at specific prices on opposite sides of the order book. At each price level, some participants offer to sell at higher prices and others offer to buy at lower prices. When liquidity providers withdraw, the order book develops severe gaps with no orders present between extreme price levels. The absence of market maker participation creates an extremely wide spread between best bid and best ask prices. New orders refill the order book after trades are completed. During liquidity withdrawal, scattered orders from ordinary traders become the only available counterparties. Liquidity exists at price levels where pending orders are present.