When we think about cryptocurrency exchanges, the slogan “orderbook” comes to mind very often. This element of the stock exchange is the basic tool that informs us about liquidity. In this article, we will focus on providing you with basic knowledge about what an orderbook is and how it can support traders.
What is an orderbook?
The term “orderbook” refers to an electronic list of orders to buy and sell a specific security or financial instrument. The list is organized according to the price of the good. The orderbook shows us how much capital is assigned to each price level on the buy and sell side. This register helps traders by providing valuable market information and increasing the transparency of the platform.
Most exchanges use an orderbook – also cryptocurrency ones. Depending on the platform, the orderbook can take a different shape. The order register can be presented horizontally or vertically. Importantly, the orderbook is a dynamic tool – it is updated in real time during the day.
A typical orderbook consists of several elements:
- Purchase orders – these provide information on the price and order amount of the asset.
- Sales orders – shown similar to buy orders.
- Order history – showing past orders that have been executed on a given market.
The “top” of the orderbook is where you will find orders with the highest bid level and the lowest ask price. They indicate which market trend is dominant, as well as the prices to be exercised. The stock market orderbook often comes along with a candlestick chart. This visual form presents useful information about current and past market prices.
Orderbook helps traders make more informed investment decisions. The relationship between the quantity and depth of orders can help identify short term price movements. For example – a high dominance of buy orders may indicate a possible increase in the price of a given asset. The orders in the orderbook also often help in determining the support or resistance levels on the chart of the given asset. In other words, a large number of buy orders at a certain price level may constitute a barrier against further price drops resulting from the growing mass of sell orders.
Stock exchanges without an orderbook
The cryptocurrency market functions thanks to the operation of many different platforms. In addition to standard trading platforms that work with an orderbook, there are also those that do not have an orderbook on the market. In this case, the platform uses the services of an external liquidity provider.
This solution does not give us direct information on the depth of the market at a given price level. However, traders have compensation – the certainty of smooth execution of orders in specific orders. This is extremely important and useful when dealing with short-term investments, especially in the margin trading area. The stock exchange that uses this mechanism is Geco.one. The Polish platform specializes in margin trading – the lack of an orderbook allows you to quickly react to changes in the market and smoothly execute all orders.