Idea about order book, liquidty and market making

[Mr. Magkaisa]

      -     Let me bring this topic in which I had made in the other platform, were I am pretty sure in some other way it could still give a good learning start from a new comer's who will enter crypto trading. I guess this will give help anyhow to those who will decide to become a crypto traders.

Source: https://bitcointalk.org/index.php?topic=5493023.0

Hello forum community, in this topic we are going to be have a tutorial on the Order Book. As traders or investors, we normally use this, but there is no idea about this matter, especially those who are just starting out in this field of the crypto space. Therefore, in this topic, we will discuss the order book, liquidity, and market making that will give you an edge on the market compared to newbie traders who do not know this yet.

Not everything we see in the order books is from open traders. Rather, most of the time, they are coming from the market maker. Because it's their job to work with liquidity.

ORDER BOOK

In any centralized exchange, we have what is called the order book; these are the areas on the platform where we can see the sellers and buyers.

Example:


What you see in the picture is a collection of sales and purchases. And every trader has his own preferred prize. Sellers want to sell high, and buyers want to buy low. It's like we only sell in the market, and of course we won't sell at a profit. And the same is true from the perspective of a buyer; what we want is that we can buy cheaply.
The concept is the same in trading. We live it digitally, and trade is faster because there are many participants worldwide. And also, for the knowledge of others here, the trade will only take place when the buyer and seller agree on the same price. The order book can also be said to be an area of liquidity.

     

Now, trades can only be executed when the buyers and sellers agree on the same price. And buying and selling's representation on the chart is this candlestick. And during the buying and selling activity of market participants, not only candlesticks are formed at the same time that the volume is formed. Like in the picture below,



These are the calculations of how many coins were sold or bought at particular times.

LIQUIDITY

The definition of this in the financial market is how quickly assets can be sold or bought without affecting their price valuation. The good example here is that the highly liquid currency is the US dollar. Even though there are many people buying and selling it on various forex exchanges, its value is not simply affected because it is stable.
In the cryptocurrency world, Bitcoin is a highly liquid asset. There are several important aspects for us to say that an asset is liquid, and the first one is:

1. "Ease of Conversion": It must be easily converted into cash for another asset, which means there must always be buyers and sellers willing to sell a particular asset.

2. "Market Depth"



This is the depth of the order book; open orders in the order book can be considered liquidity. Because they are a collection of orders and willing to buy and sell the assets at
a specific price level.

3. "Spread"



This refers to the gap between bid and ask prices. When the asset is liquid, the spread is low for sure. The difference between and asking price is small. Because there are always market participants willing to buy and sell assets. And liquid assets normally have market makers working there so that the order book for traders is always clean.

Market Maker

It could be an individual participant or a member firm of an exchange. For example, in the case of Binance, they pay someone to work for them as a market maker. But the small, centralized exchanges that serve are only for the project owners. Especially the new projects or the new crypto projects that are not well known.
That's why they handle it at the beginning, and when it grows, they hire market makers. Actually, market makers play a crucial role because they also contribute to liquidity. Adjusting the order book so that the bid and ask spread is not far. They also ensure that in a particular trading pair, there is always an available token.

Example:



Again, the market maker's job is to place open orders there, as you can see in the picture. Because not every time there are buyers or sellers of orders there, one after the other. That's how they put one after the other and close together. So that's how it is because the market makers are filling the gaps. Market makers need to keep the trading pair so that the spread does not go away.

So it is not automatic that the spread of the trading pair in the order book becomes low; there is someone working there; it is either a bot that has been set up by the market makers or manually monitored. Market making is also not just focused on one, because where a token is listed, all of them have VIP access to the exchanges. And they need to keep the price of the token that does not deviate from its price on other exchanges.
That's why sometimes you wonder why the price is higher on Binance while it is lower on other exchanges. It's normal for that to happen because they can't control the buyers, especially with sudden big failures. And when that happens, the market maker will chase it so that the price of each exchange does not go away. And there are also arbitrage traders who help with that too.

[gunhell16]

You did a good job on this dude; very basic but a big help to newbies, even to others who don't know yet. Thank you for something like this—that you share basic knowledge about buy and sell by doing day trade or long-term trade.

I appreciate the effort you are showing here just to share what you know in the field of the community here on this forum platform. There are others who only know how to buy and sell, and they think that's the end of it, but in the end, what they do is based on luck because they don't know how to read a chart or graph. So it is fine and appropriate for them.

[hugeblack]

Defining Bitcoin as Bitcoin is a highly liquid asset, even if it is correct, but mentioning it in the wording of ORDER BOOK is incorrect. In ORDER BOOK, the liquidity available on the platform is what may attract traders, meaning that small and medium exchanges have become focused on USDT/low marketcap altcoin paors liquidity. More than its focus on providing Bitcoin liquidity, the reason for this is that many people tend to speculate in these pairs more than in the Bitcoin pair.


Also, the ORDER BOOK differs depending on the platform and trading pair. If it is a platform like Binance, any buy or sell order can be executed due to high liquidity, but in small platforms you may need to wait for the order to be executed.

[Findingnemo]

The detailed explanation about order book is absolutely correct but I want to mention about the con of using orderbook in the trading platforms, let's say you see an order that is available for buying at very cheap price than market rate but still its open so you immediately try to buy them but it's no more and this strategy is usually followed by every centralized exchanges to create fake liquidity, volume to attract more traders.

[hugeblack]

The detailed explanation about order book is absolutely correct but I want to mention about the con of using orderbook in the trading platforms, let's say you see an order that is available for buying at very cheap price than market rate but still its open so you immediately try to buy them but it's no more and this strategy is usually followed by every centralized exchanges to create fake liquidity, volume to attract more traders.

It does not happen like this, as the order is executed not by placing it, but when filling it, so that when it refers to the current market price, it is executed.
Liquidity is created by trading bots that issue thousands of purchase orders, which lead to an increase in the price when the supply is limited, but these orders are canceled as soon as the price rises, or the platform may do this to try to prove that there is great liquidity in the platform, but then you can easily notice that these orders are fake. If executing buy and sell orders takes time.

[Findingnemo]

the platform may do this to try to prove that there is great liquidity in the platform, but then you can easily notice that these orders are fake. If executing buy and sell orders takes time.

Exchanges were found doing that in 2019



If they did in the past then I don't find any reason to believe they are not doing that and that's why I give good attention to the market orders before jumping into trades cause there won't be any actual orders or enough volume to trade buy/sell at the market price.