Learn how the order book - matching engine works

1.6.8 · Stock-Market › Order Types & Mechanics

WHAT is an Order Book?

Key derived quantities (first principles se):

Best bid = koi bhi buyer jo sabse zyada price pay karega = bid side ka top.
Best ask = koi bhi seller jo sabse kam price accept karega = ask side ka top.
Spread woh cost hai jo "instantly cross" karne mein lagti hai:

Figure — Learn how the order book - matching engine works

HOW the Matching Engine Works — Price/Time Priority

Matching rule (derive karo isse)

Do orders cross karte hain (trade ho sakti hai) jab: $Buy price \geq Sell price$

Yeh inequality kyun? ₹101 offer karne wala buyer ₹100 ya kam par bhi khush hai; ₹100 maang raha seller ₹101 ya zyada pe bhi khush hai. Toh koi bhi buy price ≥ koi bhi sell price matlab dono satisfied hain → trade hoti hai.

Kis price par trade hoti hai? Us order ke price par jo book mein pehle se resting thi (passive/maker order). Incoming aggressor (taker) resting price accept karta hai.

Worked Example 1 — Ek simple cross

Pehle ki book:

Bids (buy)		Asks (sell)
Price	Qty	Price	Qty
100.5	200	101.0	150
100.0	300	101.5	400

Best bid = 100.5, best ask = 101.0 → Spread = 0.5, Mid = 100.75.

100 shares ka market buy aata hai.

Yeh best ask (101.0) se liquidity leta hai. Kyun? Market order best available price accept karta hai; best ask sabse sasti seller hai.
$Q_{fill} = min (100, 150) = 100$ . Kyun min? Hume sirf 100 chahiye.
Trade 101.0 par print hoti hai. Ask 101.0 par ab 50 bachi hain.

Result: buyer 101.0 pay karta hai, spread unchanged (best ask abhi bhi 101.0).

Worked Example 2 — Multiple levels sweep karna

Wahi book. Ab 250 shares ka market buy aata hai.

Ask 101.0 (qty 150) hit karo: fill $min (250, 150) = 150$ . Kyun? Best price pehle. Remaining need = 100.
Agle level 101.5 (qty 400) par jao: fill $min (100, 400) = 100$ . Kyun upar jao? Pehla level exhaust ho gaya, next-best price ab best ask hai.
Total filled 250. Average price = $\frac{150 ( 101.0 ) + 100 ( 101.5 )}{250} = 101.2$ .

Worked Example 3 — Limit order jo rest karta hai (liquidity add karta hai)

Limit buy: 300 @ 100.7 aata hai (best ask 101.0 hai).

Kya yeh cross kar sakta hai? Chahiye buy price ≥ sell price → $100.7 \geq 101.0$ ? Nahi. Kyun? Buyer 101 nahi dega, seller 100.7 tak nahi aayega.
Toh yeh bid side par 100.7 par rest karta hai.
Naya best bid = 100.7 → naya spread = 101.0 − 100.7 = 0.3 (tighter!).

Yeh trader maker hai (liquidity add ki). Baad mein isse cross karne wala taker hai.

Common Mistakes

Flashcards

Order book kya hota hai?

Ek real-time sorted list of all resting limit orders: bids (highest price pehle) aur asks (lowest price pehle), har ek ke saath price + quantity.

Best bid vs best ask?

Best bid = sabse zyada price jo buyer pay karega; best ask = sabse kam price jo seller accept karega.

Spread ka formula?

Spread = Best Ask − Best Bid.

Mid price ka formula?

(Best Bid + Best Ask) / 2.

Do orders kab trade kar sakti hain?

Buy price ≥ Sell price.

Match kis price par execute hota hai?

Resting (maker) order ki price par; incoming taker usse accept karta hai.

Ek match mein kitni quantity fill hoti hai?

min(incoming qty, resting qty).

Price–time priority kya hai?

Pehle best price se match karo; agar prices tie karein, toh earlier order (FIFO) pehle fill hoti hai.

Maker vs taker?

Maker liquidity add karta hai (order book mein rest karti hai); taker liquidity remove karta hai (existing order ko cross karta hai).

Slippage kya hai?

Jab ek bada order multiple price levels se walk karta hai, top of book se worse average price milti hai.

Kya market order price guarantee karta hai?

Nahi — yeh execution guarantee karta hai, price nahi.

Best ask se neeche ka limit buy kya karta hai?

Bid side par rest karta hai (cross nahi kar sakta); new best bid ban sakta hai aur spread tight kar sakta hai.

Recall Feynman: ek 12-saal ke bacche ko explain karo

Socho ek bada whiteboard hai. LEFT side par, bacche likhte hain "main ek card ₹10, ₹9, ₹8 mein khareedoonga..." (sabse zyada upar). RIGHT side par, bacche likhte hain "main ₹11, ₹12 mein bechooonga..." (sabse kam upar). Ek referee dekh raha hai. Jis pal top buyer ki price top seller ki price ke barabar ya zyada ho jaati hai, woh chillata hai "MATCH!" aur card ko pehle likhi gayi price par money ke liye swap kar deta hai. Agar do bacchon ne same price likhi, jo pehle likh ke aaya woh pehle trade karta hai. Agar tum kaho "bas mujhe abhi ek khareed do," referee sabse saste seller ko pakad leta hai — lekin agar tumhe bahut saare chahiye, woh sabse saste ko leta hai, phir usse agle saste ko, toh average par thoda zyada pay karte ho. Bas yahi poora game hai.

Connections

Limit Order vs Market Order — do order types jo book ko populate aur hit karte hain.
Bid-Ask Spread & Liquidity — spread tumhe stock ke baare mein kya batata hai.
Slippage & Market Impact — book ko walk karne ki cost.
Maker-Taker Fee Model — exchanges liquidity providers ko reward karte hain.
Order Types & Mechanics — parent chapter.
Level 2 Market Data — book ki poori depth dekhna.