FOLLOW THE MECHANISM
- 1Quote
Makers post quantities and limit prices.
- 2Match
Incoming orders consume eligible resting quantities.
- 3Account
Executed quantities become balance changes and fees.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
Read a book as conditional offers
A bid offers to buy a quantity at a stated price; an ask offers to sell. The highest bid and lowest ask define the displayed spread. Each row is a price and an available quantity, not a promise that the quantity will remain until another order arrives. Orders can be canceled, partially filled or replaced. Market depth describes the inventory available across multiple price levels, which is more informative for a large order than the best displayed price alone.
Limit orders and market orders
A limit order specifies a price boundary: a buy should not pay more than its limit, and a sell should not receive less. It may execute immediately against available better prices or remain unfilled, depending on order instructions. A market order prioritizes obtaining an execution against available liquidity, without the same price boundary. Matching details differ by venue. Coinbase’s documented price-time priority is an example; decentralized order books can distribute matching and settlement across different components.
Derive the average execution price
Consider illustrative asks of two units at 10, three at 11 and five at 12. Buying four units consumes two at 10 and two at 11: the total cost is 42 and the average price is 10.5 before fees. The screen’s best ask of 10 was available for only half the order. This arithmetic explains price impact without predicting prices. A limit buy of four units at 10 could fill only two units in this static example.
What depth does not tell you
The book is a snapshot of resting orders, not a complete measure of demand or reliable future liquidity. Makers can cancel when volatility increases. Orders hidden by venue rules, latency, priority and transaction ordering can change the result. A large displayed order may disappear before execution. Distinguish a book’s current quoted depth from completed volume, and distinguish both from a venue’s ability to honor withdrawals. A liquid-looking order book cannot establish that a custodian is solvent.
MAKE IT CONCRETE
A spread is not a fee schedule
If the best bid is 99 and the best ask is 101, an immediate buy and immediate sale lose roughly two units per token before separate trading fees, assuming those quotes remain available.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
- A limit price does not guarantee a fill.
- Displayed depth may vanish before an order executes.
KEEP EXPLORING