Limit Order Book
A limit order book (LOB) is a dynamic electronic system that records and organizes all outstanding limit orders for a financial instrument. It maintains two sorted lists - buy orders (bids) ranked by highest to lowest price, and sell orders (asks) ranked by lowest to highest price. The LOB is fundamental to modern electronic trading, providing transparency into market depth and facilitating price discovery.
Structure and organization
The limit order book consists of two main sides:
- Bid side: Contains all buy orders, sorted by price (highest to lowest)
- Ask side: Contains all sell orders, sorted by price (lowest to highest)
For each price level, the LOB aggregates and displays:
- Price
- Total quantity available
- Number of orders
- Timestamp of first order at that level
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QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Market depth and price discovery
The LOB provides crucial information about market depth at different price levels. This transparency helps traders understand:
- Available liquidity at each price point
- Bid-ask spread
- Potential price impact of trades
- Order flow imbalances
The interaction between limit orders in the book drives the price discovery process, as new orders either match against existing ones or join the queue at their specified price level.
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Order matching mechanics
When a new order arrives, the matching engine:
- Checks for crossing prices (bid ≥ ask)
- Executes trades at the best available price
- Updates remaining quantities
- Maintains price-time priority
Impact on trading strategies
The LOB structure influences various algorithmic trading strategies:
- Market making decisions
- Optimal order placement
- Liquidity provision strategies
- Implementation shortfall management
Traders must consider:
- Queue position at each price level
- Order book imbalances
- Potential adverse selection
- Market impact of large orders
Time-series considerations
Modern LOB systems must handle:
- High message rates during peak trading
- Microsecond-level timestamp precision
- Real-time analytics and aggregation
- Historical reconstruction capabilities
- Market replay functionality
The temporal nature of order book data makes it particularly suitable for time-series analysis and storage in specialized databases optimized for temporal queries and analytics.