Order book definition

Order books are often used by traders to identify market sentiment. For short-term traders in particular, order books are valuable as they show whether bulls or bears are dominant in the market.

Typically, order books are made up of three main components:

• Buy orders – shows buyer information including volume and price
• Sell orders – shows seller information including volume and price
• Order history – shows the orders that have been made in the past

Order books don’t cover every order in the market, as ‘dark pools’ also anonymously take orders. Dark pools are private exchanges that don’t show the identity, nor the intent (e.g. buy or sell) of an order. These are orders from whales – large traders in the market such as banks or corporations – who don’t want their trading activity to be publicly available.

Given the large volume of whales’ trades, if this information was widely available it would give traders a clear indication of how a market’s price might move.