What is an order book and why does it matter?
An order book is a list of all pending buy and sell orders on a single exchange for a single pair, for example BTC/EUR. Buy orders (bids) wait below the current price, sell orders (asks) above it. You can find an explanation of the basic terms in our glossary under the entry "order-book".
Why bother with it? Because the price you see on the chart is just the last completed trade. It does not tell you how much you can buy or sell at a similar price. Only depth and spread tell you that.
What is the spread and how do you calculate it?
The spread is the difference between the best bid (the highest price at which someone wants to buy) and the best ask (the lowest price at which someone wants to sell).
A concrete example. Let us say you see:
| Side | Price | Volume |
|---|---|---|
| Best ask | 100.05 EUR | 3 units |
| Best bid | 100.00 EUR | 4 units |
The spread is 100.05 - 100.00 = 0.05 EUR, that is 0.05 % of the price. That is a tight spread. It means that if you buy at the ask and immediately sell at the bid, you lose 0.05 % on this difference. That is your instant price for liquidity.
The wider the spread, the more expensive it is to trade immediately. On illiquid pairs the spread can easily be 1 % or more.
What is depth and how does it differ from the spread?
The spread concerns only the best price on both sides. Depth tells you how much volume is waiting behind these best prices, that is how far the book reaches.
Let us look at a fuller example of the sell side (asks):
| Price (ask) | Volume at level | Cumulative volume |
|---|---|---|
| 100.05 EUR | 3 | 3 |
| 100.10 EUR | 5 | 8 |
| 100.20 EUR | 10 | 18 |
| 100.50 EUR | 40 | 58 |
The cumulative volume is the sum of everything available up to a given price. When you look at this column, you see how much you can buy before the price moves to a certain level.
How do I tell if the market can handle my order?
This is where depth and spread come together into a single number: slippage. Slippage is the difference between the price you expected and the average price you actually get, because your order "eats through" several levels of the book.
Let us stay with the table above and say you want to buy 10 units with a market order.
- 3 units you buy at 100.05 EUR
- 5 units at 100.10 EUR
- the remaining 2 units at 100.20 EUR
Let us measure it. You pay (3 × 100.05) + (5 × 100.10) + (2 × 100.20) = 300.15 + 500.50 + 200.40 = 1001.05 EUR for 10 units. The average price is 100.105 EUR.
Against the best ask (100.05 EUR) you paid 0.055 % more. That is your slippage. A small order got lost in the depth, the market absorbed it comfortably.
Now the opposite situation. If you wanted to buy 58 units, the last units would go at 100.50 EUR, that is almost 0.45 % above the best ask. Same book, much bigger order, much bigger slippage. The market still handles it, but at a cost.
How much depth is "enough"?
There is no single universal number for this question and we do not want to invent one. "Enough" depth is always relative to the size of the order you are thinking about, and to how much slippage you are willing to accept.
A useful way to look at it is a ratio: how large is my order relative to the cumulative volume up to a certain price distance (say within 0.5 % of the mid price). If your order swallows most of the liquidity in this band, expect large slippage. If it is a fraction, the market will probably absorb it unnoticed.
An important note: the order book shows only what is visible now. Invisible liquidity (hidden and iceberg orders) as well as vanishing liquidity (orders that disappear the moment the market starts falling) mean that the real slippage can differ from the one you calculate from the current snapshot of the book.
What to take away from this?
After this lesson you should be able to:
- Read the spread and express it as a percentage of the price, not just in absolute numbers.
- Tell the difference between the best price (spread) and what lies behind it (depth).
- Estimate slippage by "walking" your order through the book level by level and calculating the average price.
- Assess the size of your order relative to the depth, instead of only looking at the last price on the chart.
What remains uncertain?
The order book is a photo of a single moment on a single exchange. It does not tell you how the book will change in the second when you send your order, how much liquidity is hidden, nor what is happening on other exchanges and in aggregated liquidity. Calculating slippage from the current snapshot is therefore an estimate, not a certainty. We describe how the mechanics work; we do not tell you what you should trade or when.