The Benefits of Order Books

As many of you are no doubt aware, Football Index are implementing an order book for the platform.

Over on IndexGain, I’ve picked up a lot of chatter (and had several personal messages) expressing excitement but also apprehension. Order books are something that it seems the majority have no direct experience of and of course it’s only human nature to be cautious of something we don’t completely understand. This article will hopefully go some way in explaining what order books are, but more importantly something we have not heard enough of, the positives of order books, which are many.

Below I’ll outline the benefits of order books and what it means to your portfolio and to your trading.

So what are order books?

Rather than reinvent the wheel too much here I urge you to watch FIGs good video on this subject. However in brief and according to Wikipedia, “An order book is the list of orders (manual or electronic) that a trading venue (in particular stock exchanges) uses to record the interest of buyers and sellers in a particular financial instrument. A matching engine uses the book to determine which orders can be fulfilled i.e. what trades can be made.”

In terms of Football Index currently, you have buyers and you have sellers for players.

At the moment prices are determined by demand using a specific mechanism internal to FI. When traders buy x amount of a player, the price will tick up, when traders sell or list x amount the price will tick down. As a buyer you only have the current buy market price available as an option when purchasing. As a seller, you have 2 options, list the player at current buy price and wait for a match or you can Instant Sell. Instant sell means getting your money now but at the cost of selling your player at a price lower than the current market buy.

Order books mean traders get the option to not just take/get the market buy price on offer or the instant sell price. Instead, they can create their own buy price (Bid) as well as set their own sell price (Ask) when trading on the platform. Bid and Ask prices will vary from trader to trader which in turn create a multitude of prices which would then be stored on the order book.

The Pending Buyers side of the book contains all the pending buy orders, while the Pending Sellers side has all the pending sell orders. On each side, you can see the amount of shares that traders are looking to buy/sell as well as the total amount of cash each order represents.

So using the Salah example above, the part of the screen in pink/red shows the sell side of the order book. A multitude of sell prices (the asks) are offered by Salah owners with the lowest ask being £10. Basically, either a single trader or group want to sell shares in Salah for £10 each – and the total number of shares on sale at that price is 3223.

The blue part of the screen shows the buy side (the bids). The best possible bid price being £9.99. A single trader or group want to buy Salah for £9.99 each – and the total number of shares wanted is 722.

As part of the order book, there will be a matching engine. Its job is to provide the handshake between buyers and sellers. It matches up bids and asks to complete trades. In the example above, the first bids to be matched will be those offered at the highest price (£9.99) and the first asks to be matched will be those offered at the lowest price (£10.00).

There is no match yet, unless a buyer says “Ok, I’ll up my bid for 100 shares in Salah by 1p”. When this happens, 100 shares will be exchanged from the 3223 on sale to the buyer.

Then you will see 3123 shares remaining on the sell side at £10 and 622 shares on the buy side at £9.99.

So now we have covered what an order book is, what exactly are the benefits? Below I explain how it gives you a better understanding of the market to help you both manage your portfolio as well as offer new trading opportunities and techniques to Football Index.

Greater Control

Firstly as touched on above, it offers the trader greater control at what they are prepared to both sell at and buy at. A trader can make their own price, be it a buy or a sell. Let’s take a look at an example

As you can see there is quite a spread on Cherki above.

As a holder, a trader can list at the current buy price (£3.78) or take the hit and Instant sell at £3.44. The instant sell means getting your cash in the here and now, but with it comes a sizeable financial cost.

However, listing at buy price might mean the sell takes 18 days to finally get sold. Perhaps neither option is appealing, but what about a compromise? How about making an offer to prospective buyers in between the current buy price and sell. £3.78 might see the trader waiting 18 days, but what about £3.70?

Perhaps that could entice a buyer in a matter of hours or even minutes. As a seller you can set your own price, multiple prices in fact should the trader desire. Each price with their own corresponding quantity the trader is willing to sell at.

On the flip side a trader who wants to get on the Cherki train might be keen but not at the current price. Maybe the trader has decided that the max they are willing to pay is £3.70. Well, no need now for the trader to stare at the screen in the hope of that price arriving, they can set their bid at £3.70 and get on with their day. If it gets matched then the trader becomes a Cherki holder, if not they kept discipline and didn’t pay over what they were prepared to offer. All done in a timely efficient manner allowing them to focus on something else entirely.

Weight of Money

Order books can give a clear indication as to whether the buyers or sellers are in control of the market. If there is an abundance of buy orders compared to sell orders, its very likely that the player price is due to increase amid buying pressure. Information is power, traders can use the weight of money indicator to predict where the price is headed and adjust their buys and sells accordingly to maximise their returns.

Market Making

For players with a lack of both buy and sell orders (thin market) there may be a large gap between the current best bid and ask price. A trader could use this opportunity to place orders on both sides of the market. This is what is known as market-making in financial markets, the goal being to profit on the bid/ask spread.

Validation

This is more about the market in general. With order books come additional validation to many financial investors, that the product looks and behaves much more like any other market. I’ve had many conversations with potential investors and the question of order books arises more than any other. Implementation will mean growth to the market as a whole.

Conclusion

So that’s it. There are other trading techniques that I may go into at a later date. However, the key point here is that order books represent an opportunity to the market as a whole and to you personally as the trader. It creates added depth to the platform, greater control and additional ways to make money. And what can be wrong with that.

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Bishop
Written by Bishop
Worked in Asset Management for 10+ years. Professional Trader of Things since 2013: currency, sports, footballindex, tiddlywinks. IndexGain Co-founder
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