The order book

In the last three lessons you learned what market, limit, and stop orders do. Now look under the hood: where do orders wait, and how does the exchange decide who gets filled?

The order book

When you place a limit order away from the current price, it does not vanish. It joins the exchange’s order book: the list of every resting buy order (bids) and resting sell order (offers) at each price. The CFTC describes an order book as a market structure in which bids and offers are matched based on their price and the time they arrived.

All electronic orders for CME Group products go through CME Globex, CME’s electronic trading platform, no matter which broker you use.

The DOM: your window into the book

Your platform shows the book as a vertical price ladder, usually called the DOM, short for Depth of Market. CME describes a DOM as a visual order entry screen where traders can drag and drop orders, and lists what it usually shows:

• the contract name and expiry,
• the current bid and ask,
• how much is waiting at prices above and below the current price, typically 5 to 10 ticks each way,
• on many DOMs, the volume that has traded at each price during the day.

CME’s Trading Simulator, for example, has a price ladder showing up to 10 levels of depth.

A typical layout (example prices, not real quotes):

The rows above the spread hold sell orders; the rows below hold buy orders. Platforms arrange columns differently, so read your own platform’s labels.

How a fill happens

CME’s matching rules use two words worth learning:

• A resting order is one already sitting on the book.
• An aggressor is an incoming order that can trade immediately against resting orders, such as a market order, or a limit priced at or through the other side.

When an aggressor arrives, the exchange finds the best opposite price and matches the aggressor against the resting orders there. If the aggressor is bigger than what is resting at that price, it moves on to the next price, as you saw in Lesson 2.

In the table above, a market buy for 5 contracts would take 5 of the 12 offered at 6,000.25. The 7 left are still the best ask.

Who is first in line

If 12 contracts are offered at 6,000.25 by several different traders, who gets filled first? CME decides with a matching algorithm, a set of rules for allocating fills. CME supports several different algorithms across its markets, and FIFO is one of them.

The easiest to picture is FIFO (first in, first out). CME says FIFO uses only price and time: at the same price, the first order to arrive is the first matched. CME also notes that an order loses its place and goes to the back of the line if you:

• increase its quantity,
• change its price, or
• change the account number.

This is why a limit order can see price touch it and still not fill: the orders ahead of it in line absorbed the trades.

Key ideas

• The order book holds resting bids and offers at each price.
• The DOM (Depth of Market) is your platform’s ladder view of the book: bid, ask, and the quantity waiting at nearby prices.
• A fill happens when an aggressor order meets resting orders at the best price.
• Under FIFO, price comes first, then arrival time. Raising size or changing price sends your order to the back of the line.