Limit order book
Quantitative Finance glossary · Market Microstructure & Statistical Arbitrage
Definition
Price-ordered record of all resting limit orders at each exchange — the canonical electronic-market data structure. Best bid and best ask quote the inside spread S = a - b; depth at successive price levels gives the marginal cost of larger orders. Order-book imbalance (ρ = (Q_b - Q_a)/(Q_b + Q_a)) is a leading indicator of short-term price moves (HFT signal). Hidden/iceberg orders and pegged orders are visible only on execution. Cont-Stoikov-Talreja queueing models the book as a multi-class M/M/1 system.
Limit order book in plain English
A limit order book is just the exchange's live list of everyone waiting to buy or sell a stock, sorted by price — like two lines at a market, one of buyers naming the most they'll pay and one of sellers naming the least they'll accept. The highest buy price and lowest sell price are the "best bid" and "best ask," and the gap between them (the spread) is roughly the cost of trading instantly. The book also shows how many shares are stacked at each price, which tells you how much a big order would move the price as it eats through the layers. A neat trick traders use: if the buy side of the book is much fatter than the sell side (order-book imbalance), the price often ticks up next — that lopsidedness is a short-term clue about where things are headed.
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