#Definition
An order book is a real-time list of all outstanding buy orders (bids) and sell orders (asks) in a market, organized by price level. It displays how many shares traders are willing to buy or sell at each price, revealing the market's depth and available liquidity.
In prediction markets, the order book is the mechanism that matches buyers and sellers. When you place a limit order, it joins the book until filled or canceled. When you place a market order, it immediately matches against existing orders in the book.
#Why It Matters in Prediction Markets
The order book is the infrastructure underlying price discovery in prediction markets.
Price formation: The best bid and best ask define the current tradeable prices. The gap between them, the spread, represents the cost of immediate execution.
Depth visibility: Traders can see exactly how much liquidity exists at each price level before committing capital, enabling informed decisions about order sizing and execution strategy.
Information content: Order book dynamics reveal trader behavior. A sudden appearance of large bids might signal informed buying; vanishing asks before an announcement might indicate sellers with advance knowledge.
Execution planning: Large traders use the order book to estimate slippage and plan whether to execute immediately or patiently accumulate positions.
#How It Works
#Order Book Structure
The order book has two sides:
Bid Side (Buy Orders)
- Orders from traders wanting to buy
- Arranged from highest price (best bid) to lowest
- Represents demand for the asset
Ask Side (Sell Orders)
- Orders from traders wanting to sell
- Arranged from lowest price (best ask) to highest
- Represents supply of the asset
#Visual Representation
ASK SIDE (Sellers)
Price │ Size │ Cumulative
─────────┼────────┼───────────
$0.58 │ 2,500 │ 6,000
$0.56 │ 1,500 │ 3,500
$0.54 │ 1,000 │ 2,000
$0.52 │ 1,000 │ 1,000 ← Best Ask
═════════╪════════╪═══════════
│ SPREAD │ $0.04
═════════╪════════╪═══════════
$0.48 │ 800 │ 800 ← Best Bid
$0.46 │ 1,200 │ 2,000
$0.44 │ 2,000 │ 4,000
$0.42 │ 3,000 │ 7,000
BID SIDE (Buyers)
#Visualizing Order Book Depth
Left side = Bids (Demand), Right side = Asks (Supply)
#Key Metrics
Best Bid: 0.52 (lowest price sellers will accept) Spread: 0.50 (average of best bid and ask)
#Order Matching
When a new order arrives, the matching engine processes it:
- Marketable orders (willing to cross the spread) execute immediately against resting orders
- Non-marketable orders (priced inside the spread or beyond) join the book
- Price-time priority: Among orders at the same price, earlier orders fill first
#Numerical Example
Current book shows best ask at $0.55 with 500 shares available.
Scenario: Buy market order for 800 shares
Step 1: Buy 500 @ $0.55 = $275 (clears best ask)
Step 2: Buy 300 @ $0.57 = $171 (next price level)
─────────────────────────────────────────────────
Total: 800 shares for $446
Average price: $0.5575
Expected vs. displayed: $0.0075 slippage per share
#Examples
#Example 1: Tight Spread, Deep Book
A major election market shows:
- Best bid: $0.64 (50,000 shares)
- Best ask: $0.65 (45,000 shares)
- Spread: $0.01 (1.5%)
This indicates high liquidity. A trader can buy or sell thousands of shares with minimal price impact. The narrow spread suggests strong market maker presence and trader confidence in the current probability range.
#Example 2: Wide Spread, Thin Book
A niche regulatory market shows:
- Best bid: $0.35 (200 shares)
- Best ask: $0.45 (150 shares)
- Spread: $0.10 (22%)
The wide spread reflects uncertainty and limited participation. A trader buying at 0.35; a $0.10 loss per share.
#Example 3: Asymmetric Depth
A sports outcome market shows:
- Bid side: $500,000 within 5% of mid-price
- Ask side: $50,000 within 5% of mid-price
The imbalance suggests strong buying interest. Large buy orders could execute smoothly, but large sell orders would face significant slippage as they consume thin ask-side liquidity.
#Example 4: Order Book Dynamics
Before an earnings announcement:
- 10 minutes before: Spread widens from 0.08
- Market makers pull orders, reducing depth by 80%
- After announcement: Spread returns to $0.02 within seconds
This pattern reflects risk management. Market makers reduce exposure during high-uncertainty periods, then return once new information is priced in.
#Risks and Common Mistakes
Assuming displayed depth persists
Orders can be canceled instantly. A trader seeing 10,000 shares at $0.55 might find only 2,000 available by the time their order reaches the exchange. This is especially common during volatile periods.
Ignoring the spread when calculating returns
A trade that crosses the spread twice (buying then selling) incurs double the spread cost. In a market with 5% spread, round-trip trading costs 10%; a significant hurdle for profitability.
Market orders in thin books
Placing a market order without checking depth can result in catastrophic fills. In extreme cases, buying 1,000 shares might clear every level up to 0.50.
Misreading cumulative vs. level depth
Order books show both size at each price level and cumulative size. Confusing these metrics leads to incorrect slippage estimates.
Relying on stale data
Order book data requires low-latency connections. Traders using delayed feeds may see prices that no longer exist, leading to failed orders or unexpected fills.
#Practical Tips for Traders
-
Check the full depth, not just top of book: The best bid/ask only tells part of the story; examine how much is available within your expected price range
-
Use limit orders to avoid slippage: Set your maximum price rather than accepting whatever the market offers
-
Size orders relative to visible liquidity: Keep individual orders to 10-20% of available depth to avoid excessive price impact
-
Watch for depth patterns: Consistently large orders at round numbers (like $0.50) may indicate significant support or resistance levels
-
Consider hidden liquidity: Some platforms allow "iceberg" orders that only display a fraction of total size; actual depth may exceed what's visible
-
Monitor order book changes: Rapid depth changes often precede price moves as informed traders reposition
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Account for the spread in expected value: Your breakeven probability is the ask price when buying, not the mid-price
#Related Terms
#FAQ
#How does an order book differ from an AMM?
An order book matches discrete buy and sell orders from individual traders. An AMM (Automated Market Maker) uses a mathematical formula and liquidity pool to provide continuous pricing without individual orders. Order books offer more precise pricing and potentially better execution for large orders, while AMMs guarantee liquidity but with predictable slippage based on trade size.
#Can I see who placed orders in the book?
On most platforms, order books are anonymous; you see prices and sizes but not trader identities. On blockchain-based platforms like Polymarket, wallet addresses may be visible, but connecting addresses to real identities requires additional investigation.
#Why do order books sometimes show the same price on both sides?
In properly functioning markets, the best bid should always be below the best ask. If they cross (bid ≥ ask), those orders should immediately match and execute. Displayed crosses usually reflect stale data, pending order processing, or display artifacts.
#What happens to my limit order if it doesn't fill?
Unfilled limit orders remain in the book until filled, canceled, or expired (if you set an expiration). They become visible to other traders and may fill later if the price moves to your level. Some platforms charge fees for canceled orders or orders that remain open too long.
#How do order books handle market resolution?
When a market resolves, most platforms cancel all open orders and settle existing positions. Orders in the book at resolution time become void; winning positions pay 0, and unfilled orders are simply removed without execution.