Foundations · Lesson 3 · Beginner

Order book, bid, ask, spread, slippage

You can read an order book and understand why spread and slippage are immediate costs.

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The order book

Bids are buy orders below the market, asks are sell offers above it. The spread is ask minus bid and an immediate cost factor.

Slippage

A market order eats through ever more expensive levels, and the average price gets worse. In thin liquidity, slippage explodes exactly when you have to get out.

Increase the size and watch how the average price slides into the order book.

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Test yourself

You buy immediately and sell again immediately. What do you lose at a minimum?

nothing
the spread
the funding rate

The key points at a glance

The bid is the best buy price, the ask the best sell price, and the spread is the difference.
A market order eats through ever more expensive levels, and that is slippage.

Deep dive

Reading an order book: depth is what counts

The order book is the list of all open limit orders. Bids are buy offers below the market, asks are sell offers above it. What matters is the depth below the top line, not just the top spread.

Liquid market: bid 65,725.50, ask 65,725.51, spread 1 cent.
Illiquid: bid 65,000, ask 70,000 means a 5,000 dollar instant loss.
BTC and ETH compress the spread, small coins are expensive.

Slippage: why size costs disproportionately

A market order matches the best opposing order. If the size isn't enough, it eats through more expensive levels and your average price gets worse. The price impact grows convexly, according to Taleb roughly with the exponent 3/2.

An order twice as large costs more than twice the slippage.
In a flash crash the other side is swept clean, and the emergency exit slips through.
When scalping with many trades, slippage hits especially hard.

Limit instead of market: cutting instant costs

The limit order guarantees the price, not the fill. It sits in the order book as a maker, and maker fees are lower than taker fees, sometimes zero or even negative. Entering as a maker saves fees and slippage in one move.

Use limit orders to enter and trade selectively.
A limit order is not guaranteed to fill.
If the price runs away without you, let the trade go.

There is no single price: the mark price

Crypto trades across many exchanges, each with its own order book, meaning isolated liquidity pools. The same coin quotes slightly differently at the same moment, and each exchange has its own spread and its own depth.

The last trade on your exchange is only a local snapshot.
Futures settle against an aggregated mark or index price.
This protects you from liquidation by an artificial wick on a single exchange.

Sources: Goodman, Elder

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