Markets and trading vocabulary

0.9 How a market works

An exchange runs a matching engine for each instrument (a stock, a futures contract, a BTC/USDT pair). Participants send it orders over the network; it matches buyers with sellers and tells everyone what happened. Chapter 6 goes into the data structures; this is the picture.

Orders. A limit order says “buy 2 BTC at 60,000 or better” and waits in the book until someone sells at that price. A market order says “buy 2 BTC now at whatever price is available” and trades immediately against the waiting limit orders. Orders can be cancelled or modified while they wait. Every order gets an id, and every change the exchange makes is a message.

The book. The order book is the set of waiting limit orders for one instrument, grouped by price. Buy orders are bids, sell orders are asks (or offers). The highest bid and the lowest ask are the top of book; the gap between them is the spread; the quantity waiting at each price is depth. Orders at the same price are usually filled in the order they arrived, so queue position matters. The smallest allowed price step is a tick.

Matching. When a new buy order’s price meets or crosses the best ask, the engine fills it against the resting asks, best price first, and publishes a trade. Any remaining resting quantity stays in the book; the incoming order’s remainder rests only if its type and time-in-force allow it. A market order does not become a resting limit order. A fill is the result for the participant: part or all of the order has traded.

Market data. The exchange publishes the book’s changes as a feed. At the start you take a snapshot of the whole book, then apply a stream of incremental updates: level changed, level removed, trade happened, each carrying a sequence number so you can tell whether you missed one. A gap means your copy of the book is wrong until you resynchronise. Traditional exchanges send this over multicast UDP with their own binary formats; crypto venues send it over WebSocket, often as JSON, with a REST snapshot to start from. The feed handler’s job is to keep a local copy of the book correct and to do it fast.

Market makers. A market maker keeps a bid and an ask resting in the book at the same time, earning the spread when both sides trade, and carrying the risk that the price moves while it holds a position (its inventory). Every time the market moves it must cancel and replace its quotes before someone trades against the stale ones. That cancel-replace loop, from a book update arriving to a new order leaving, is the hot path this book is about, and the reason a microsecond matters: whoever updates first keeps the spread, whoever updates last pays it.

0.10 Trading terms used in this book

The chapters use these without further explanation; section 0.9 gives the picture they fit into.