Implementing a CLOB system, we will need to look at the order book to see the ask and bid deals for a market.
How to Read the Order Book
The order book is a real-time list of all outstanding buy (bid) and sell (ask) orders for a specific market. It provides a transparent view of market liquidity and the collective sentiment of traders. Understanding the order book is essential for informed decision-making, especially when placing limit orders.
Bids (Buy Orders): Listed in red, these are the orders from traders who want to buy shares. They are arranged from the highest price to the lowest. The highest bid is the most someone is willing to pay right now.
Asks (Sell Orders): Listed in green, these are the orders from traders who want to sell shares. They are arranged from the lowest price to the highest. The lowest ask is the least someone is willing to accept right now.
The Bid-Ask Spread: The difference between the highest bid and the lowest ask. A tight spread indicates high liquidity and a healthy, active market. A wide spread suggests low liquidity, which can lead to greater price volatility when large orders are placed.
Market Depth: The order book also shows the cumulative volume of bids and asks at different price levels. This "market depth" helps you visualize how much liquidity is available to absorb a large order without significantly affecting the price.