The order book: bids, asks, depth and the spread

What you will learn

• How a central limit order book is organised into price levels on the bid and ask side.
• How to calculate the mid price, the spread in euros and in basis points, and the microprice.
• How to measure depth and order book imbalance, and why both can change in seconds.
• Why tick size and order cancellations limit what the book can tell you.

Explanation

An order book is the list of all resting limit orders for one instrument on one venue. A limit order is an order to buy or sell at a stated price or better. Orders wait in the book until someone trades against them or they are cancelled.

• Bid: an order to buy. The highest bid is the best bid.
• Ask (also offer): an order to sell. The lowest ask is the best ask.
• Price level: all orders at the same price, shown with their total size.
• Level 1 data shows only the best bid and best ask with sizes. Level 2 (market depth) shows several levels on each side.

Spread and mid price

Spread = best ask − best bid and Mid = (best bid + best ask) ÷ 2.

To compare instruments with different prices, express the spread relative to the mid in basis points (bps; 1 bp = 0.01%):

Spread (bps) = Spread ÷ Mid × 10,000

Microprice

The mid ignores how much size sits on each side. The microprice (size-weighted mid) leans towards the side with less size, because that side is more likely to be used up first:

Microprice = (Bid × Ask size + Ask × Bid size) ÷ (Bid size + Ask size)

Depth and imbalance

Depth is the total size available within a chosen number of levels or a price distance, for example "within 0.25% of the mid". It tells you how large an order the book can absorb before the price moves.

Order book imbalance compares the two sides:

Imbalance = (Bid size − Ask size) ÷ (Bid size + Ask size)

The result lies between −1 and +1. A positive value means more visible buying interest. It is a short-term description, not a forecast.

Tick size

The tick size is the smallest allowed price step. In the EU, MiFID II sets minimum tick sizes for shares by price and liquidity, so a liquid share may move in steps of €0.01 or €0.005, while a less liquid one may use larger steps. When the spread equals one tick, it cannot become narrower, and queues at the best price grow long.

What the book does not show

• Hidden volume, such as the unseen part of iceberg orders (lesson 4).
• Orders on other venues: the same share may trade on several books at once.
• Intentions: visible orders can be cancelled at any moment. Placing orders with no intention of trading in order to mislead others (spoofing) is market manipulation and is prohibited under the EU Market Abuse Regulation (MAR), but cancellations for honest reasons are normal and frequent.

Worked example

Hypothetical example: a share with the following five-level book (sizes in shares).

1. Spread: €20.02 − €20.00 = €0.02.
2. Mid: (€20.00 + €20.02) ÷ 2 = €20.01.
3. Spread in bps: 0.02 ÷ 20.01 × 10,000 ≈ 10.0 bps.
4. Microprice: (20.00 × 500 + 20.02 × 800) ÷ (800 + 500) = (10,000 + 16,016) ÷ 1,300 ≈ €20.0123. It is above the mid because the ask side at the top is thinner.
5. Top-of-book imbalance: (800 − 500) ÷ 1,300 ≈ +0.23.
6. Depth over five levels: bids 800 + 1,000 + 700 + 1,500 + 900 = 4,900 shares; asks 500 + 400 + 600 + 900 + 1,200 = 3,600 shares.
7. Five-level imbalance: (4,900 − 3,600) ÷ 8,500 ≈ +0.15.

Interpretation: a buy order of up to 500 shares fills at €20.02; a buy of 1,500 shares would use the first three ask levels. Exclusions: hidden volume, other venues, fees, and changes to the book while you act.

Common mistake

Practice activity

Hypothetical book: best bid €8.40 for 2,000 shares; asks €8.43 for 600, €8.44 for 700, €8.45 for 1,500 shares.

1. Calculate the spread in euros and in bps.
2. Calculate the microprice and the top-of-book imbalance.
3. Which ask levels does a buy order for 1,500 shares reach?

Key takeaways

• The spread in bps (spread ÷ mid × 10,000) makes costs comparable across instruments.
• The microprice uses sizes and is often a better "fair" reference than the simple mid.
• Depth tells you how much size an order can take before it moves the price.
• The visible book is incomplete and can change instantly; describe it, do not forecast from it.

Next step

The next lesson explains who keeps quotes in the book: market makers and other liquidity providers.