16 lines
2.2 KiB
Markdown
16 lines
2.2 KiB
Markdown
# Order Book
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In finance and market making, an *order book*is the list of digital orders that a [market maker](market-maker.md) uses to record the interest of buyers and sellers in a particular [financial asset](financial-asset.md). 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.
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The *bid–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 bid–ask spread is a measure of the liquidity of the market for an [asset](assets.md) 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.
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The *depth* of an order book is the the quantity of the [asset](asset) to be sold versus unit price. A deep market is one in which a large order is needed to move the price.
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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.
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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](price-formation.md) on a given exchange. Distortions of the order book and order matching can be used to do [market manipulation](market-manipulation.md).
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## References
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1. Harris, Larry. Trading and exchanges: Market microstructure for practitioners. OUP USA, 2003.
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1. Aldridge, Irene. High-frequency trading: a practical guide to algorithmic strategies and trading systems. Vol. 604. John Wiley & Sons, 2013.
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1. Cont, Rama, Arseniy Kukanov, and Sasha Stoikov. "The price impact of order book events." Journal of financial econometrics 12, no. 1 (2014): 47-88.
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1. Mertens, Jean-François. "The limit-price mechanism." Journal of Mathematical Economics 39, no. 5-6 (2003): 433-528. |