# Order Book

In finance and market making, an *order book*is the list of digital orders that a market maker uses to record the interest of buyers and sellers in a particular financial asset. The market maker uses a software algorithm known as a matching engine which orders are fulfilled and which matches bids with asks, in either a full or partial fill.

The *bidâ€“ask spread* is a measure of the difference between the prices quoted for an immediate sale (ask) and an immediate purchase (bid). The size of the bidâ€“ask spread is a measure of the liquidity of the market for an asset and of the size of the transaction cost. In exchange making between two assets The bid-ask spread is measured a percentage in point or price interest point known as a *pip*, or unit of change in an exchange rate of the two assets. A *basis point* (*bp* or "bip") is a difference o) one hundredth of a percent or equivalently one percent of one percent or one ten thousandth 0.01% or or 0.0001.

The *depth* of an order book is the the quantity of the asset to be sold versus unit price. A deep market is one in which a large order is needed to move the price.

The other property of an order book making is the *tick size* which refers to the minimum price increment at which trades may be made on the market.

There are vast differences in design of different matching engines and ways of calculating the market maker spread to give rise to different dynamics of price formation on a given exchange. Distortions of the order book and order matching can be used to do market manipulation.

## References

- Harris, Larry. Trading and exchanges: Market microstructure for practitioners. OUP USA, 2003.
- Aldridge, Irene. High-frequency trading: a practical guide to algorithmic strategies and trading systems. Vol. 604. John Wiley & Sons, 2013.
- Cont, Rama, Arseniy Kukanov, and Sasha Stoikov. "The price impact of order book events." Journal of financial econometrics 12, no. 1 (2014): 47-88.
- Mertens, Jean-FranĂ§ois. "The limit-price mechanism." Journal of Mathematical Economics 39, no. 5-6 (2003): 433-528.