How to Read the Order Book — Level 1 and Level 2
Right in the middle of a trading screen, red and blue numbers pile up in layers. This 'order book' is a real-time map of the market's supply and demand.
What the order book is
The order book is a table that organizes the pending limit orders for a given security by price level, on both the buy and sell sides.
· The bid side is demand ('I will buy'), and the highest value is the best bid. · The ask side is supply ('I will sell'), and the lowest value is the best ask. · The gap between the two is the bid-ask spread.
A trade executes at the point where the best bid and best ask meet.
Level 1 vs Level 2
Quote information is divided by how much depth it shows.
· Level 1 shows only the best bid and best ask — that is, just the 'top single line.' · Level 2, also called market depth, shows the full size stacked across multiple price levels.
Looking at Level 2, you can gauge which prices have thick orders piled up and which are thin. Korean trading platforms (HTS) typically display the remaining size for up to 10 price levels together.
Do not over-trust the displayed size
The order book is useful, but there are reasons you should not take it at face value.
First, quotes can be canceled or amended at any time. Orders that looked thick can vanish right before execution.
Second, there is hidden size. When only part of a genuinely large order is exposed, as with an iceberg order, the size on screen fails to show all the actual supply and demand.
Third, in some markets there exists 'spoofing' — inflating displayed size and then canceling it — which is significant enough to be a target of regulation.
The order book is merely a 'snapshot of current pending orders,' not a prophecy that tells you future prices.
The remaining size in the order book changes in real time and there is hidden size too. This article does not recommend techniques for timing trades off the order book; it emphasizes the limits of short-term prediction based on displayed size.
常见问题
Q. Can Level 2 tell me the direction of the price?
No. Level 2 only shows the pending orders stacked right now, and those orders can be canceled or amended, plus there is hidden size. Thick pending size does not guarantee the price will move in that direction.
Q. What does a wide bid-ask spread mean?
It means the gap between the best bid and the best ask is wide, which typically shows up in thinly traded or low-liquidity securities. When you buy or sell at market in such cases, execution cost (slippage) can be large.
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