Understand Order Book Depth and Execution

What the order book shows

This is a model depth view of the Nifty 25,000 call. The left side lists buyers: the best bid is ₹280.40, where buyers want 1,950 units, or 30 lots. The right side lists sellers: the best ask is ₹280.50 for 1,300 units. The gap between them, 10 paise, is the spread.

Brokers show the best five price levels on each side, which NSE calls market depth. The exchange's full book runs much deeper, and a paid feed provides 20 levels.

How orders are matched

NSE matches orders by price, then by time:

1. The highest bid and the lowest ask are matched first.
2. At the same price, the order that arrived first is filled first.
3. An order that cannot be matched at once waits in the book at its price.

A market buy order takes the asks from the lowest price upward until it is filled. A limit buy order at ₹280.45 sits between the best bid and ask, becomes the new best bid, and waits for a seller to accept it.

Spread, depth and liquidity

• The spread is the cost of immediacy. Buying at the ask and selling at the bid costs the spread, 10 paise per unit here, or ₹6.50 per lot. In a far strike with a ₹3 spread, the same round trip costs ₹195 per lot.
• Depth is the quantity available near the best prices. Deep books absorb large orders with little price movement.
• Liquidity is both together: a tight spread and deep book mean you can trade size at close to the quoted price. Liquidity is highest near the ATM strike, in the current expiry, during the first and last hours of the session.

Slippage and market impact

Slippage is the difference between the price you expected and the price you got. It comes from the spread, from the book being walked by your own order, and from the price moving between your decision and your fill. Market impact is the part your own order causes.

For a retail order of a few lots in a liquid Nifty strike, slippage is usually a tick or two. For large orders, or in stock options and far strikes, it can be a significant share of the trade's expected profit. Our slippage calculator estimates the cost from the depth, and iceberg orders split a large order into legs so that the full size never sits in the book.

Reading the book for information

Traders read the order book for signs of where buyers and sellers are:

• Imbalance. Far more quantity on the bid side than the ask suggests buying pressure, though large visible orders can be placed to influence others and then cancelled.
• Large orders at a price. A big ask at a round number is a level where sellers are waiting; price often slows there.
• Changes in depth. Orders being pulled from the ask side as price rises suggest sellers stepping back.
• The tape. The sequence of trades at the bid or the ask shows whether buyers or sellers are hitting the market.

These readings are short-lived and noisy. High-frequency firms read the book in microseconds, and a retail trader sees it with a delay. Our guide to high-frequency trading in India explains the gap. For retail strategies, the book is more useful for execution than for prediction.

The pre-open session and the opening price

For stocks, orders placed between 9:00 and 9:08 are collected without matching, and the exchange computes the opening price at which the most quantity can be matched. The pre-open order book looks different from the continuous book, and its indicative price moves as orders arrive. F&O contracts open at 9:15 directly in continuous trading.

Circuit limits and price bands

Stocks have daily price bands of 2%, 5%, 10% or 20%, beyond which orders are not accepted. When a stock hits its band, the book on one side empties. F&O contracts have operating ranges that are revised during the day rather than hard limits, and indices have market-wide circuit breakers at 10%, 15% and 20% that halt trading.

Using the order book in a rule-based strategy

• Execution rules. Place entries as limit orders at or one tick through the best price, rather than market orders, so that the strategy pays the spread but not the depth. See order types.
• Liquidity filters. Trade only strikes where the spread is below a threshold and the depth at the best price covers the order size.
• Size limits. Cap the order at a share of the visible depth, such as 20%, and use iceberg legs above it.
• Time filters. Avoid the first two minutes after the open, when books are thin and spreads wide.

QuantPower's live trading terminal shows market depth for each contract, and the strategy builder applies limit-order execution with a configurable buffer.

Frequently asked questions

Sources

• NSE: Market mechanism and order matching
• SEBI circular on index-based market-wide circuit breakers, and NSE price band framework