How price is discovered on the ESX order book

Every trade on an exchange is the meeting of two intentions: someone willing to sell at a price, and someone willing to buy at it. The order book is simply the record of those intentions, sorted by price and then by time. Understanding how it works explains most of what an investor finds surprising about their execution.

Limit orders and market orders

A limit order specifies the worst price you will accept. It may not execute at all, but it will never execute at a price worse than the one you set. A market order specifies no price and will execute against whatever is available, which in a thin book can be considerably worse than the last traded price you saw quoted.

In a young market with limited depth, this distinction is not academic. A market order for a size larger than the resting volume at the best price will walk up the book, filling successively worse until it is complete. The average price you receive can differ meaningfully from the price that prompted you to trade.

Why depth matters more than the headline price

The quoted price tells you where the last trade happened. It does not tell you how much you could buy at that price. Depth, the volume resting at each price level, determines what your order will actually cost. This is why a dealer committing capital to both sides of the book improves outcomes for everyone trading in that security.

Practical implications

Use limit orders when price matters more than certainty of execution. Discuss larger orders with a dealer before placing them. And treat the last traded price as information about the past, not a quotation for your own trade.