Crypto Academy / Season 4 /Week 3 / Homework post for [awesononso] - The Bid-Ask Spread (Part II)
Define the Order Book and explain its components with Screenshots from Binance.
Order book as is evident from its name that, it is a book of orders. Book refers to records of a particular order type assembled at one place. Order refers to a buy or sell order. So we can say that, order book is a dynamic record keeping section of a particular exchange. We know that crypto trade is carried out in pairs. For example, STEEM/BTC pair , suppose a trader places a buy order for BTC in exchange for STEEM, its record will be maintained on the order book under STEEM/BTC Buy orders section. Similarly, let's say another trader buys BTC from ETH. This record will be maintained on order book under BTC/ETH buy section. Let's take example of sell orders, suppose a trader sells STEEM and gets BTC, the record will be maintained in sell orders section of order book.
screenshot of STEEM/BTC pair order book taken from my binance account
Each order Book has two sections. Bid section and Ask section. Bid section represents the buy orders of the target pair and Ask section or sell section represents the sell orders of the target pair. Buy orders are represented by the green colour and sell orders are represented by the red colour.
The crypto order book is "dynamic" In nature. It means that above orders are open and they are getting executed continuously. So if we check the order book of the same pair after some time, we won't find same orders as shown above. Let me again show you order book of same pair, less than 5 minute have passed when i have taken above screen shot. Compare that with below given screenshot.
Screenshot to demonstrate dynamism of order book
Binance also presents the feature where we get to choose the range of orders. Look at screenshot below.
In the above screenshot, all the orders below 0.00000001BTC will be displayed. We have scored of orders. Now let's look for orders worth 0.00001 BTC.
We can see that we have only two orders in buy and two in sell section.
We can gather some information about the market indirectly from the order book like trend of the market, Bid-Ask spread,
Trend can be found by looking at quantity of orders. If buy orders are more then sell orders, it means that market is in uptrend and if sell orders are more than buy orders , it signals towards downtrend.
Bid-Ask spread is calculated from order book by taking difference of lowest bid from highest Ask price.
Who are Market Makers and Market Takers?
Few months ago, i was confusing mkers as buyers and takers as sellers. But that is not the case.
Market makers refers to traders (buyers/sellers) of any type ( individual, financial institutions or brokers) that provide liquidity to the market by placing limit orders. Since limit orders don't get executed instantly as they are placed at price different from market price , therefore these orders add liquidity to the market . They tend to benefit from bid ask spread and are charged less fee than market takers.
Market takers refers to traders (buyers/sellers) of any type ( individual, financial institutions or brokers) that take out liquidity from the market by placing market orders. Since market orders get executed instantly as they are placed at existing price, therefore these orders drain liquidity from the market .
The market maker taker model tend to maintain the price of an asset as it prevent takers to deplete the liquidity and makers to set prices that are too high or low to get executed.
What is a Market Order and a Limit order?
Market order
Market order is that type of buy or sell order where a buyer or seller places an order at market price. Market price refers to a price that is existing in the market at the time of placing an order . So these orders are rapidly executed because buyer or seller is ready to sell at a price which the counterparry on the other side is willing to pay. So no time is needed to wait for favourable price fluctuation to occur. Example, market price of BTC is $43151 right now. If i place buy or sell order at the same market price. This order will be called market order and will be executed instantly.
Limit order.
Limit order is that type of buy or sell order where a buyer or seller places order of an asset at a price differenr from the spot price or market price (existing price at that point) . Example, suppose i want to sell 1 BTC in market and this time the market price of BTC is $43151 but i am not satisfied with this price, so i set my own price limit at $50000 . So this is a limit order. It will only be executed once BTC price reaches $50000 . Same holds true for buy orders, suppose i want to buy 1 BTC . I saw market price at this time was $43151 . But i wanted to buy it at lower price. So i place a limit order with price of $40000 (say} . This order will only be executed once price reaches that level.
Explain how Market Makers and Market Takers relate with the two order types and liquidity in a market.
Market makers place limit orders where as market takers place market orders. Market makers provide liquidity to the market where as market takers take out liquidity from the market.
For every buyer there must be a seller. When buy market order is placed, there is counterparty which is selling the asset. As order gets executed, the requisite amount of asset is withdrawn from the market and there by consumes liquidity. When a limit order is placed, liquidity is added to the market till the time limit order is executed. At the time of execution, even market maker act as market takers.
Place an order of at lease 1 SBD for Steem on the Steemit Market place by
a) accepting the Lowest ask. Was it instant? Why?
b) changing the lowest ask. Explain what happens.
(Make sure you are logged in to your wallet).
Log in steemit wallet. We get option to buy or sell steem.
in buy steem section, enter amouamout of SBD aa 1 on the price that is there. Click on buy steem. Next confirm the transaction and complete with the help of active key or owner key
Order is placed. Shortly after placing order is executed although not instantly. It is because we placed it at a price at which someone is willing to sell. But due to low liquidity of steemit internal market even after accepting lowest ask, it took time for order to get executed.
Change of lowest ask.
As i have to buy steem. I changed price from 0.082353 to 0.070000.
Enree amount of SBD as 1 .
i would get 13.682 STEEM for 1 SBD.
Proceed same as above.
Order is placed but is pending. As i have changed price. I'll have to wait for price to reach that level.
Place a TRX/USDT Buy Limit order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots).
Buy limit order.
Open Binance app. From bottom panel of options , click on markets. Select a trading pair containing one cryptocoin that we have on the exchange wallet and the other coin that we want to purchase. Example, i waited to buy TRX from USDT. So i search for TRX/USDT pair and order book will load. Next we click on Buy.
On the next page we change order type from market to limit , fill details like amount of TRX to be bought or amount of USDT . For buy limit order , i'll chamge price of TRX from market price of 0. 09 to 0.07 and place the order.
At the limit price, i selected to buy TRX worth 15.04 USDT for which i will get 214.4 TRX. Then hit the "Buy TRX" Button. Order is placed but is pending
So my limitt order for TRX got listed in order book and will be executed once limit price is reached and i acted as market maker because i provided Liquidity to
the market worth 15 USDT.
Place a TRX/USDT Buy Market order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots of the completed order).
Buy Market order.
Open Binance app. From bottom panel of options , click on markets. Select a trading pair containing one cryptocoin that we have on the exchange wallet and the other coin that we want to purchase. Example, i waited to buy TRX from USDT. So i search for TRX/USDT pair and order book will load. Next we click on Buy.
On the next page, fill details like amount of TRX to be bought or amount of USDT .. For market order , price of TRX has to be same.
At the market price, i selected to buy TRX worth 15.04USDT for which i would got 154.8 TRX. Then hit the "Buy TRX" Button. Order is placed amd executed instantly.
So my market order for TRX gor executed instantly and i acted as market taker because i consumed Liquidity of TRX worth 15 USDT.
Take a Screenshot of the order book of ADA/USDT pair from Binance on the day you are performing this task. Take note of the highest bid and Lowest ask prices:
a) Calculate the Bid-Ask.
b) Calculate the Mid-Market Price.
<screenshot of ADA/USDT order book taken from my Binance account
From the screenshot, the highest bid of ADA/USDT was 2.231USDT and the lowest ask of ADA/USDT was 2.232USDT
- Calculate the Bid-Ask
Given;
Bid price= 2.231USDT
Ask price= 2.232USDT
Required; Bid-Ask spread
Mathematically,
Bid-Ask= Ask price - Bid price
Bid-Ask =2.232 - 2.231= 0.001 USDT
- Calculate the Mid-Market Price.
Mid-Market Price = (Bid Price + Ask Price)/2
Where;
Bid price = 2.231USDT
Ask price = 2.232USDT
Therefore,
Mid-Market Price = (2.232 + 2.231)/2
Mid-Market Price = 4.462/2
Mid-Market Price = 2.232USDT
Conclusion
Order book is a record of orders placed by traders which is continuously updated as previous orders get filled and new orders are placed. Order book help us to understand other market parameters like bid ask spread and trend in the market.
Hello @drqamu,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You explain very well and with clear illustrations. Great job!
The second question just needs some work.
The arrangement of the images and paragraphs could be better as well.
Thanks again as we anticipate your participation in the next class.
Thank you. I'll try to do better here forth.
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