Bids & Asks

What is it?

Definition

A bid (or limit buy) is a “passive” buyer who advertises the price and size they would like to buy at. An asks (or limit sell) is a “passive” seller who advertises the price and size they would like to sell at.

Concept

Trading markets at their core consist of buyers and sellers.

There are two types of buyers (or sellers): passive and aggressive.

• Aggressive --> are those that buy/sell at the current price.

• Passive --> are those that are patiently waiting for price to arrive at a price level that they are interested in.

Without these passive participants, trading markets as they are defined today could not exist. Price would fail to increase or decrease because there would be no one on the other side (passive buyer/seller) willing to take that order -- price would forever remain at the same level.

Price only increases and decreases when there are no longer passive buyers (or sellers) at the current price level and the aggressive (market) order triggers a passive order at a different price.

Example

Let’s dive into an example: If the current price of BTC is 30,000 and Joe wants to buy $100 at 29,000 he can place a limit buy order of $100 at 29,000. This order is displayed to all participants in the orderbook. Similar to Joe, there are other traders who are interested in buying at various price levels. Let’s say Jillian wants to buy $50 at price level 28,000 and Jack is willing to buy $25 at 27,500. Now the buy side of the orderbook looks like this:

30,000 → Current Price 29,000 → $100 28,000 → $50 27,500 → $25

Users do not know the exact size and price level of every single participant, rather the aggregate at each price level. Now let’s say Alice also wants to buy $25 at 27,500. The orderbook now changes to:

30,000 → Current Price 29,000 → $100 28,000 → $50 27,500 → $50 [we add $25 to the same price level].

Similar to the limit buys (bids), we have limit sells (asks). - Matt wants to sell $200 at 30,100. - Molly also wants to sell $100 at 30,100. - Mary is willing to sell $50 at 30,200 and another $50 at 30,300. - Finally, Mike is interested in selling $100 at 31,000.

Now the full orderbook is:

31,000 → $100 30,300 → $50 30,200 → $50 30,100 → $300 30,000 → Current Price 29,000 → $100 28,000 → $50 27,500 → $50

Technically, the current price of $30,000 means this is the last price a transaction occurred. Since there are no bids or asks at 30,000, the next aggressive (market) order will triggered a new price level. If it is a market buy order, it will hit 30100 and it is a market sell order it will trigger 29000. Let’s say Trader X market buys $250, this then changes the orderbook to:

31,000 → $100 30,300 → $50 30,200 → $50 30,100 → $50 → [300 -250 = 50. Also now the current price] 29,000 → $100 28,000 → $50 27,500 → $50

Trader Y also market buys $75. The orderbook is now:

31,000 → $100 30,300 → $50 30,200 → $25 [$50 at 30100 is all taken and the remaining 25 is subtracted from 30200. Also the new Current Price]. 29,000 → $100 28,000 → $50 27,500 → $50

The interaction of market and limit buys is how markets ultimately move and knowing the activity of limit buyers and sells can provide a great deal of insight into the markets.

How can it be used?

Bids & Asks data can be used in a myriad of ways.

Supply/Demand

We’ll start with the simplest way: supply and demand. Bids represent demand and asks represent supply. Let’s say we sum up all the bids (from 0 to the current price) and that sum is $10million. The sum of all asks (from current price to infinity) is $5m. This means there is more demand than supply. In fact, there is twice as much demand than supply, which could indicate bullish pressure. Why? For price to go down, you require twice as much force than for price to go up. Now of course, like most things in trading, it’s not as simple as this and we’ll get into why things can get complex. But for now, it’s important to understand that bids and asks can represent demand and supply.

Bid & Ask Walls (Support / Resistance)

If let’s say a new participant, Trader X, enters the market and wants to buy $500 million at 29,500… suddenly, there is massive buy pressure (demand). Trader X is actually executing their orders and the current price (say 30,000), and is willing to wait until price drops. Price may never reach 29500 and Trader X’s order may never get executed, but the demand has been advertised to the market as everyone now knows that there is a $500million limit buy order(s) at 29,500. This leads to buy pressure in two ways: Price drops from 30000 to 29500 but for it to drop further, we need 500million in aggressive sell orders to eat through Trader X’s order. This is a lot of supply required and creates friction for price to further drop – in a way acting like support. As mentioned above, since the market knows that there is 500million worth of demand at 29500, they start buying realizing there is a massive imbalance in the markets. This causes the price to rise and it never reaches the 29500 level.

In both cases, the 500million bid creates direct or indirect buy pressure. Traders often refer to these extremely large limit buys/sells as “walls” (bid wall / ask wall).

Spoofs (“Fake Orders”)

We mentioned earlier that using bids as a proxy for demand and asks as a proxy for supply comes with a caveat. That caveat is spoofs or fake orders. Traders have the ability to cancel their limit orders. There are many reasons traders may want to cancel their orders before price reaches that level. Perhaps they simply changed their mind, or received new data which made them lower their bid, or found a better opportunity elsewhere. These are all valid reasons a limit order can be canceled, however, another reason is to simply create fake buying or selling pressure without ever having the intention of executing that order. In other words, that $500 million order at 29500 we mentioned earlier – well imagine if price starts to drop from 30000 reaches 29550 and suddenly that 500 million disappears. If trader X placed this large limit buy order with the intention of never wanting to buy, then this is known as a spoof. Manipulating the markets like this can be common as it is hard to truly identify whether the order was a spoof or canceled due to the other reasons mentioned above. We often see that when a large limit order is canceled or a wall is removed, it can lead to price volatility as other participants have to readjust with this new information.

Filtering the Orderbook

One can get a better understanding of supply / demand by breaking it up into tranches and also potentially filtering out spoofs. Let’s go back to the same example where there is a 500 million buy order at 29500 and the current price is 30000. If we filter the orderbook within 1% of the current price: 29700 to 30300 and then take the sum of bids and asks, this can paint a completely different picture of where supply demand is since prices further away from current price (like the one at 29500) are no longer included. The following filters are currently available: Quote, 1%, 2%, 5%, 10%, 20%, and full orderbook.

Quote is the best (nearest) bid price and ask price. Often this can be a good way to filter out potential spoofs as the likelihood of faking an order so close to price is low. In addition, looking at the quote level can also show market maker (MM) activity as they tend to make up a bulk of the quote bid/ask market share.

Exchange Comparisons

The orderbook indicator can be displayed in aggregated mode which is the sum of all bids and asks on exchanges selected by the user. Like other indicators that are aggregated – one can drill down to individual exchanges.

In some cases, viewing the fully aggregated data can be useful as it can remove noise on one particular exchange. In other cases, investigating the activity of certain exchanges could be useful. One example of this is TWAP. Suppose, we have a large player who wants to enter a position. An efficient way to do this is to slowly bid the price and average over a period of time (TWAP or time weighted average price). Often, this can be spotted by an increase in the bids. When the TWAP is complete, the bids may drop back to normal levels. On an aggregated basis, this may be hard to spot but by drilling into each exchange one may be able to identify such patterns.

Where can I find this?

Orderbook data is currently available on our TradingView Charting Application. From charts, users can go to Indicators → Orderbook (Beta). Bids & Asks indicator is available in this orderbook suite.