What is an order book?

An order book works by checking every new order against the orders waiting on the other side. On Xetra, "each new order is immediately checked for execution against orders on the other side of the order book". The software that runs this check is the matching engine. If the prices match, a trade happens at once. If not, the order waits in the book until a matching order arrives or the trader deletes it.

The waiting orders follow price/time priority. A buy order with a higher limit and a sell order with a lower limit come first. Among orders with the same limit, the older order comes first. On Xetra, market orders, which carry no price limit, have priority over limit orders. SIX in Zurich applies the same principle and sorts all orders in its order books by price and by the time of receipt.

A limit order book is an order book made up of limit orders, each with a price limit that the buyer will not exceed or the seller will not go below. That is the usual order book definition on an exchange. The highest buy limit is the best bid, the lowest sell limit is the best ask, and the gap between them is the spread. An example: with a best bid of EUR 100.00 and a best ask of EUR 100.05, the spread is EUR 0.05.

When all participants send their orders to one book, it is a central limit order book. Xetra runs continuous trading this way, and SIX offers a Central Limit Order Book as one of its three market models. Explained simply, such a book is a queue of limit orders per price level, served from the best price down and, at each price, by arrival time.

Order book depth is the volume that waits at each price level beyond the best bid and ask; order book imbalance is the difference between the volume on the buy side and on the sell side. Depth shows how large an order the market can take before the price moves. For a trader on the stock market, the meaning of the book goes beyond the last price: it shows the market depth at every level.

EU law makes this visible. For shares, depositary receipts, ETFs and certificates, Article 3(1) of MiFIR requires trading venues to publish "current bid and offer prices and the depth of trading interests at those prices" on a continuous basis during normal trading hours. Article 3(2) calibrates the rule for order-book, quote-driven, hybrid and periodic auction systems. Wiener Börse describes the task of its liquidity providers as offsetting imbalances between bid and ask orders in the order book. In trading, the depth in the book tells a trader how far a large order would move the price.

An order book in crypto works like the one on a stock exchange: a crypto-asset trading platform collects limit orders and matches them. Under Article 76(9) of MiCA, a platform operator in the EU publishes "any bid and ask prices and the depth of trading interests at those prices" on a continuous basis during trading hours.

An automated market maker (AMM) has no order book. The Uniswap documentation contrasts the two: most markets use "a central limit order book style of exchange, where buyers and sellers create orders organized by price level", while Uniswap prices trades from the reserves of a pool with the formula x * y = k. Compared with an order book, an AMM makes the pool the counterparty to every trade, and a large trade moves the price along the formula.

In Germany, Xetra runs the central limit order book of the Frankfurt Stock Exchange, and the Trading Surveillance Office, an independent body of the exchange, monitors the trading in it. The Exchange Supervisory Authority of Hesse supervises the proper conduct of trading, and BaFin investigates suspected insider trading and market manipulation. Wiener Börse in Austria also trades in a Xetra T7 order book, and its operator holds a license from the FMA under § 3(2) Börsegesetz 2018. MiFIR is an EU regulation and applies directly in both countries.

Switzerland is outside the EU, so MiFIR does not apply there. SIX sets its own trading rules under Article 27 of the Financial Market Infrastructure Act (FinMIA) and submits them to FINMA for approval. This page gives no legal advice.