Order book
The live electronic list of unmatched buy and sell orders for a contract, arranged by price level, showing quantity and number of orders at each price — generally up to five price levels a side.
In plain language
Every order that reaches the exchange and does not trade immediately has to wait somewhere. That somewhere is the order book: an electronic list of buy and sell orders which are available for matching (not yet converted in trade or outstanding order) for a specific security or derivatives contract organized by price level.
Read it as two queues facing each other. Buyers on the left, best (highest) price at the top. Sellers on the right, best (lowest) price at the top. The gap between the top two is where the next trade will happen.
It tells a trader three useful things: price (where others are willing to deal), availability (how much is on offer at each price, the market depth) and how many separate orders make up that quantity. Participants remain anonymous. And the book is dynamic — updated in real time throughout the day as orders arrive, trade, are modified or cancelled.
How it works
Reading the book (Chapter 6, section 6.2.4):
| Feature | What the workbook says |
|---|---|
| Buy side | Left; prices in descending order, highest first |
| Sell side | Right; prices in ascending order, lowest first |
| Depth | Generally up to five price levels each side, based on matching priority |
| Columns | Number of orders; quantity (in derivatives, lots); price |
| Totals | Total buy and total sell quantity of the overall market |
| Identity | Anonymous |
How orders use it (sections 6.2.6 and 6.3):
- Matching is continuous on price-time priority: best price first; at the same price, earlier time first. Quantity is not a factor.
- Orders resting in the book are passive; an incoming order that matches them is active. Trades happen at the passive order's price.
- A market order takes the best available prices across the depth until filled. A limit order that cannot fully match rests in the book at its limit price.
- An IOC order's unmatched balance is cancelled rather than added to the book.
The spread order book is separate: exchanges provide it for calendar spreads, where the price is the difference between the far-month and near-month contracts and can be positive, negative or zero.
A worked example
The workbook's USDINR futures order book (lots of USD 1,000):
| No. of orders | Buy lots | Buy price | Sell price | Sell lots | No. of orders |
|---|---|---|---|---|---|
| 2 | 35 | 82.5500 | 82.5625 | 10 | 1 |
| 3 | 25 | 82.5425 | 82.5700 | 11 | 3 |
| 1 | 38 | 82.5400 | 82.5750 | 184 | 2 |
| 10 | 78 | 82.5300 | 82.5800 | 42 | 1 |
| 1 | 1 | 82.5250 | 82.5975 | 86 | 4 |
What it shows at a glance. Best buy 82.5500, best sell 82.5625. The 35 lots at the best bid come from 2 orders; the 78 lots at 82.5300 from 10.
Illustrative trade on that book. A client places a market order to buy 30 lots. It walks up the sell side:
10 lots × 1,000 × 82.5625 = Rs 8,25,625
11 lots × 1,000 × 82.5700 = Rs 9,08,270
9 lots × 1,000 × 82.5750 = Rs 7,43,175
Total = Rs 24,77,070
Average price = 24,77,070 ÷ 30,000 = 82.5690
The first two sell levels disappear and 175 lots remain at 82.5750, which becomes the new best offer. Had the client used a limit order at 82.5625, only 10 lots would have traded and the other 20 would have joined the buy side at the top, as the new best bid.
Why NISM asks about it
Chapter 6 (Trading Mechanism in Exchange Traded Currency Derivatives) defines the order book in section 6.2.4 with this USDINR example, the spread order book in 6.2.5 and the matching rule in 6.2.6, then uses order book snapshots to illustrate market, limit, stop-loss and IOC orders in section 6.3.2. Expect questions on how buy and sell prices are sorted, how many price levels are shown, at whose price a trade executes, and how the book changes after a given order.
Common exam traps
- Buy prices descending, sell prices ascending. The best of each is at the top.
- Generally five price levels a side.
- Participants are anonymous; the book shows quantity and number of orders, not names.
- Trades execute at the passive (resting) order's price, not the incoming order's price.
- Quantity plays no part in priority — price first, then time.
- The totals are for the overall market, so they exceed the sum of the five visible levels.
- Calendar spreads have their own spread order book, where negative and zero prices are possible.
Check yourself
1.Buy or sell orders lying unmatched in the order book are known as:
- a)Passive orders
- b)Active orders
- c)Best orders
- d)Pending orders
Show the answer
Answer: (a) Passive orders
Orders lying unmatched in the system are 'passive' orders and orders that come in to match the existing orders are called 'active' orders.
And the distinction matters because of the pricing rule: orders are always matched at the passive order price. The matching of active order may be against a single order or multiple passive orders.
The workbook demonstrates it. With a resting sell of 100 shares @ Rs.807.60 and an incoming order... to buy 200 shares at Rs.807.65, a trade will take place for 100 shares at Rs.807.60 and not at Rs. 807.65. It should be noted that the incoming order is always matched with the passive order price.
The buyer would have paid more and did not have to.
Every order starts active: all orders come as active orders into the order book. If they get a match, they will be executed immediately; else they will enter the order book according to their price and time as passive orders.
So in that example, the balance buy order for 100 shares @ Rs.807.65 will sit in the order book on the buy side as the best buy order — becoming passive in turn.
Option C confuses this with a different idea. Best buy price is the highest buy price amongst all buy orders and similarly best sell price is the lowest price of all sell orders — a description of position in the queue, not of matched status.
The matching discipline: exchanges follow continuous matching based on price-time priority... The best price orders are matched first. If more than one order arrives at the same price, they are arranged in ascending time order.
And one thing that never matters: quantity is not a factor considered for matching.
2.How does the workbook characterise High Frequency Trading (HFT)?
- a)A type of algorithmic trading that is latency sensitive, with a high daily portfolio turnover and a high order-to-trade ratio
- b)Any order placed through the internet during peak hours
- c)Manual trading by dealers who place many orders a day from co-located terminals
- d)A type of spread trading done only in the spread order book
Show the answer
Answer: (a) A type of algorithmic trading that is latency sensitive, with a high daily portfolio turnover and a high order-to-trade ratio
The workbook: "High frequency trading (HFT) is a type of algorithmic trading which is latency sensitive and is characterized by a high daily portfolio turnover and high order-to trade ratio (OTR)."
Why the others are wrong:
- Internet orders at peak hours are ordinary internet-based trading (IBT), routed through the broker's order-routing system. Timing does not make them HFT.
- Manual trading is the opposite of algorithmic trading. Algorithmic trading generates orders through "automated execution logic", without manual order entry. Co-location is only a connectivity facility.
- Spread trading is a strategy using the spread order book. It has nothing to do with the latency-sensitive nature of HFT.
3.A buy spread order of 10 lots in USDINR MAR24MAY24 futures means:
- a)Buy 10 lots of March and buy 10 lots of May
- b)Sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures
- c)Buy 10 lots in March and sell 10 lots in May
- d)Buy 10 lots of whichever leg is cheaper
Show the answer
Answer: (b) Sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures
A buy side spread means sell near-month leg (first leg) and buy the far-month leg (second leg).
Buy spread order of 10 lots in USDINR MAR24MAY24 futures means: sell 10 lots in USDINR MAR24 futures and buy 10 lots in USDINR MAY24 futures.
The name refers to the spread, not the legs — which is exactly the trap.
And the reverse: a sell spread order of 10 lots in USDINR MAR24MAY24 futures mean: buy 10 lots in USDINR MAR24 futures and sell 10 lots in USDINR MAY24 futures.
What is being traded: USDINR future MAR24MAY24 spread contract allows participants to trade the difference of price between USDINR MAY24 futures (Far month contract/2nd leg contract) expiry and MAR24 (near month contract/1st leg contract) expiry.
A feature no other contract has: the difference which is shown on the spread contract can be positive, negative, or zero, which is not possible for all other contracts other than spread contracts.
How prices are assigned: Traded price for the first leg contract = Reference price. Traded price for the second leg contract = Reference price + the price difference entered for the spread order, where, the Reference price = Last Traded Price of the first leg contract.
Matching runs on the difference: the orders are matched in the spread order book on price-time priority only, where the price is basically the difference between the far-month contract and near-month contract.
Why use the spread book rather than two orders: the issue with entering a calendar spread trade as 2 separate orders is that there is a risk of adverse price movement between placing of both the orders. The trader is also subject to a higher margin requirement till the second order is executed. Both these issues can be fixed by using the spread order facility.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Immediate or CancelA time condition on an order: whatever can be matched the moment it reaches the market is executed, and any unmatched balance is cancelled immediately rather than waiting in the order book.
- Stop loss orderAn order that stays out of the market until the price reaches a trigger price, then enters as a limit or market order - used to cap the loss on an open position.
- Market order with protectionA combination of a market order and a limit order that lets a market order execute only up to a price level specified by the trader, so it cannot be filled at any price.
- Spread order facilityAn exchange order type that trades a calendar spread as one order — priced as the difference between far and near months — so both legs execute together at once.
- Market depthThe quantity of buy and sell orders resting at each price level in the exchange order book — shown up to five price levels a side — that tells a trader how much can be traded before price moves.
- Price-time priorityThe order-matching rule on Indian F&O platforms: the best price is matched first, and among orders at the same price, the one entered earliest gets priority.
- Kill switchA pre-trade facility that lets a trading member cancel every one of its outstanding orders with a single command — the emergency brake for a malfunctioning terminal or algorithm.
- IRRA platformInvestor Risk Reduction Access — a joint exchange platform that lets individual investors square off open positions and cancel pending orders when their trading member's services are disrupted by a technical glitch.
- Trader WorkstationThe terminal through which a trading member logs in to the exchange's trading system to enter orders and view its own orders, trades and market information.
- Disclosed QuantityAn order condition that shows the market only part of the total quantity — once that visible slice trades, the next slice is automatically released, repeating until the whole order is filled.
- Market orderAn order to buy or sell a contract at the best price currently available in the market — no price is specified, so it trades immediately against the opposite side of the order book.
- Limit orderAn order to buy or sell a contract at a specified price or better — lower for a buy, higher for a sell — which waits in the order book if it cannot be matched at once.
- Ideal priceThe average of the best bid and the best offer price in the order book — the benchmark against which impact cost is measured, and the price you would get in an infinitely liquid market.
- Passive orderAn order lying unmatched in the order book — a buy priced below, or a sell priced above, the market. Passive orders add depth and liquidity; active orders at the market price consume it.
- Active orderAn order to buy or sell at the prevailing market price, which matches immediately against an order already resting in the order book — draining liquidity rather than adding to it.