Order Book

An order book is the ranked collection of orders and quotations resting at a trading venue at a given moment. Nasdaq's own rulebook describes its version plainly: "The Nasdaq Book is a montage for quotes and orders that collects and ranks all quotes and orders submitted by Participants." The ranking is what makes matching possible. An arriving order is worked against the best price on the other side, and where several orders share that price they are taken in the sequence the venue's rules set, normally the order in which they arrived.

One clarification first, because the same phrase names something else in a related corner of finance. When underwriters gather indications of interest from investors before an initial public offering, that collection is also called an order book, and the process is called book-building. It is a one-off record of demand for a new issue rather than a continuously matching list of firm orders at a venue, and it is covered on the initial public offering page. This page is about the continuous kind.

What sits in the book is legally firm, and the rule measures that firmness in round lots. Under 17 CFR 242.600(b)(86), "Quotation means a bid or an offer", and (b)(16) defines a bid or offer as a price communicated by an exchange member or an association member to any broker, dealer or customer "at which it is willing to buy or sell one or more round lots of an NMS security, as either principal or agent, but shall not include indications of interest." Two things follow. A quotation carries an obligation to deal, at least for a round lot, which is why a book of quotations is worth more than a list of expressions of enthusiasm. And a soft signal of interest is not a quotation at all, so it does not belong in the picture. Note the vocabulary: the rules say "offer" where traders say "ask". They are the same side of the market.

Size is part of the quotation, and the rule supplies a default. Under (b)(87) the quotation size is the number of shares the quoting firm has specified it will deal for, and where it has not specified one, the size is "a normal unit of trading for that NMS security." So a quotation without a stated size is not sizeless; it defaults.

Ties across venues are broken by size, then time. The national best bid and offer, defined at (b)(60), is the best bid and best offer calculated and disseminated across the market, and the rule anticipates a dead heat: where two or more market centers transmit identical bids or offers, the winner is determined "first by size (giving the highest ranking to the bid or offer associated with the largest size), and then by time (giving the highest ranking to the bid or offer received first in time)." That is a small provision with a large consequence, because it means the venue that gets to be at the top of the national quote at an identical price is the one showing the most depth there.

What the consolidated feed carries today is the best quote, not the book. Under 17 CFR 242.603(b)(3), every exchange trading an NMS stock and the national securities association act jointly through national market system plans to disseminate "consolidated information, including a national best bid and national best offer and odd-lot information", and the single plan processor for each stock "must represent quotation sizes in such consolidated information in terms of the number of shares, rounded down to the nearest multiple of a round lot." Depth below the best bid and above the best offer is not in that stream at all; it comes from a venue's own proprietary feed. Regulation NMS does define the deeper picture, as a building block of the market-data regime the same rule is phasing in: "depth of book data", at (b)(31), means "all quotation sizes at each national securities exchange and on a facility of a national securities association at each of the next five prices at which there is a bid that is lower than the national best bid and offer that is higher than the national best offer", with the size at each of those prices attributed to the venue it came from. Five levels on each side, and no more.

Two processing rules make the public picture different from the book, and this is the part almost nothing explains. Both live in the definition of core data at (b)(26) and both bind the firms that consolidate and publish market data rather than the venues that hold the orders. First, sizes are truncated: those firms must represent the quotation sizes of the best bid and offer, the national best bid and offer, the protected quote, depth of book data and auction information "as the number of shares rounded down to the nearest multiple of a round lot." A firm bid for 149 shares on a stock with a 100-share round lot is published as 100. This is the rule already operating, because § 242.603(b)(3) imposes the same truncation on today's plan processor. Second, small orders are bundled: the best bid and offer, the national best bid and offer, the protected quote and depth of book data "shall include odd-lots that when aggregated are equal to or greater than a round lot; such aggregation shall occur across multiple prices and shall be disseminated at the least aggressive price of all such aggregated odd-lots." So a cluster of small orders at slightly different prices can enter the public quote as one line at the worst of those prices. The round lot that both rules turn on is itself price-tiered under Regulation NMS rather than a flat hundred shares, which is covered on the odd lot page.

The practical reading. A displayed book is a truthful but lossy summary. Real resting size is at least as large as the displayed size and can be materially larger; some of the interest sitting at better prices is published at worse ones; and the consolidated feed stops at the best quote, so any depth on the screen came from somewhere else. An investor sizing an order against what the screen shows is sizing it against a floor, not against the market. Whether a venue displays its book at all is a separate question again, and undisplayed venues have their own page.

Orders and quotations arrive at a venue and are placed in the book by price and then by time. An incoming order to buy is matched against the lowest offers, an incoming order to sell against the highest bids, working down or up the book until the order is satisfied or its own price limit stops it. Whatever does not execute rests, and takes its place in the queue at its price. Meanwhile the firms that consolidate market data publish a processed version of the top of the book, subject to the truncation and bundling rules above.

A hypothetical illustration of how much the public version can differ from the book. Assume a stock whose round lot is 100 shares. A firm posts a bid for 149 shares at $30.00. Consolidated market data must show the size "rounded down to the nearest multiple of a round lot", so the published size is 100 shares and 49 shares of real, firm buying interest at that price is not in the number anyone can see.

Now add three separate small buy orders of 40 shares each, priced at $30.02, $30.01 and $30.00. Individually none of them is a round lot, but aggregated they are 3 × 40 = 120 shares, which is at least one round lot, so the rule requires them to be included, aggregated across the three prices, and disseminated "at the least aggressive price of all such aggregated odd-lots" — which for buy orders is the lowest, $30.00. After truncation they contribute another 100 shares at $30.00. So a seller reading a feed built to that rule sees interest at $30.00 when two cents more per share was genuinely available, and sees fewer shares than actually rest there. None of that is concealment; it is the published summary doing what the rule tells it to do.

What a displayed book gives an investor

• It shows where firm interest sits, at the best price and at whatever further price levels the feed carries, which is the raw material for sizing an order.
• The interest it shows is legally firm rather than indicative, because a quotation carries an obligation to deal for at least a round lot.
• Price-then-time ranking is a published, predictable rule, so a resting order's place in the queue is knowable rather than discretionary.
• Its shape is the most direct available read on how much an order will move the price.

What it does not tell you

• Displayed sizes are rounded down to the nearest round lot, so real resting size is understated by construction.
• Small orders that aggregate to a round lot are published at the least aggressive of their prices, so better prices can be hidden inside a worse quote.
• The consolidated feed carries only the best bid and offer, so any depth shown on a screen came from a venue's own proprietary feed rather than from the public tape.
• Resting orders can be cancelled at any moment, so the book you sized against may not be there when your order arrives.
• Not every venue displays a book at all, and volume that trades on undisplayed venues never appears in one.