Every price you see is the result of a matching engine and two order books.
What you will learn
Explain how an exchange matches buyers and sellers
Read an order book
Define bid, ask, spread, and liquidity
Bids, asks, and the spread
Bids, asks, and the spread
Where price comes from
Where price comes from
The matching engine
An exchange is a venue where buy orders (bids) and sell orders (asks) meet. A matching engine pairs them according to price-time priority: best price first, then earliest order. When a buy meets a sell, that's a trade — and the trade price becomes the 'last price' you see on a chart.
Reading the order book
The order book lists resting orders. Bids (what buyers will pay) sit below the current price; asks (what sellers want) sit above. The gap between the best bid and best ask is the spread — your cost to trade immediately.
💡 The spread as a cost
If the best bid is $100.00 and the best ask is $100.10, the spread is $0.10. If you buy at the ask and instantly sell at the bid, you lose $0.10 per share. The spread is a hidden fee paid to market makers and a direct measure of liquidity.
Liquidity is king
A liquid market has tight spreads and deep order books — you can trade large size without moving the price. Illiquid markets have wide spreads and thin books; a modest order can move price sharply. Liquidity, not volatility, is what separates tradable from untradable.
Market vs limit orders
A market order executes immediately at whatever price is available — you pay the spread. A limit order only fills at your price or better — you set the terms but may not get filled. Knowing when to use each is core trading skill.
💡 Slippage
You place a market order for 10,000 shares but only 2,000 are available at $100. The rest fill at $100.05, $100.12, $100.20… The difference between your expected and actual average price is slippage. Large market orders in thin books are expensive.
❓ Quick check
The spread is:
A) The difference between best bid and best ask
B) The daily high-low range
C) A fee paid to the SEC
D) The price change over a week
Spread = best ask − best bid; it's your immediate trading cost.
(Knowledge check — full exam is next)
Key takeaways
Exchanges match bids and asks by price-time priority
Spread = best ask − best bid = immediate trading cost
Liquidity determines how cheaply you can trade size
📝 Weekly Exam — pass with 80% to unlock next week
10 questions. Review the Deep Dive and courses before attempting.
1. Price-time priority means orders fill:
Best price, then time-in-queue.
2. The 'last price' on a chart is:
Last trade = last matched transaction.
3. The spread between bid and ask is your:
Cross the spread to trade now.
4. A deep, liquid market has:
Liquidity → tight spreads and depth.
5. A market order:
Market = immediate, accepts current prices.
6. A limit order:
Limit = you set the price ceiling/floor.
7. Slippage is:
Price moves against you while filling size.
8. You'll pay the most to trade immediately in a:
Thin books → wide spreads and slippage.
9. Bids sit ___ the current price and asks sit ___ it:
Buyers bid below, sellers ask above.
10. Market makers earn the spread by:
They profit from the bid-ask spread.
Your score: —
🛠 Weekly Project
Read a live order book and measure the spread.
1
Open a real market (any exchange) and find a moderately liquid asset.
2
Record the best bid and best ask.
3
Compute the spread and the spread as a % of price.
4
Estimate what you'd pay to buy-and-immediately-sell 100 units.
5
Write one sentence on whether this market is liquid and why.