An auction with two sides.

Nobody has to raise a paddle

Picture an auction with buyers and sellers both naming terms. Buyers submit prices they will pay; sellers submit prices they will accept. The exchange's matching engine, the software that matches orders under its trading rules, pairs buyers and sellers when their terms allow a trade.

This is a continuous double auction: double because both sides submit orders, continuous because matching can happen throughout continuous trading. There is no single seller waiting for one final winning bid. Many trades can occur at different prices.

The order book records orders still waiting to trade. These orders can trade later, change or be cancelled. An order is an intention offered to the market. A completed trade is an event that actually happened.

The two edges of the auction

The best bid is the highest available buying price. The best ask, also called the offer, is the lowest available selling price. The gap between them is the spread. Best means most attractive to someone taking the opposite side, not best value for the business.

When bids remain below asks, these waiting orders do not meet. An arriving buyer can accept an offer, or an arriving seller can accept a bid. A limit order sets the highest buy price or lowest sell price you accept; it can trade immediately if a waiting order meets that limit. A market order seeks the best available opposite orders without your own limit price. Neither guarantees a complete fill.

For ordinary eligible orders in continuous trading, better prices get priority, then earlier orders at the same price. A resting order is one already waiting in the book. A match trades at that waiting order's price. A fill is the quantity of an order that actually trades. Now watch what taking those waiting quantities does to price.

A falling price still has a buyer

At 200 shares, the seller has taken all the displayed buying at ₹501. At 250, the next 50 shares trade with the earlier buyer at ₹500. The latest execution in that replay is now ₹500.

Exactly 250 shares were bought and 250 were sold. Count each matched share once and traded volume is 250, not 500. The price fell between executions because selling reached a lower waiting bid, not because more shares were sold than bought.

Turn the mechanism around: buying that takes the available offers can reach higher asks. Waiting orders may also be removed or replaced before another trade. Price movement depends on quantities available at particular prices and willingness to accept them, not a headcount of optimistic and pessimistic people.

A price move tells you where trading reached. It does not count everyone's opinion.

Where this model helps you

For a beginner, this model explains why a quote is not a promise. For anyone placing an order, it helps separate the price shown from the quantity available there. Use it when a fill differs from the last price, or when a position would require several price levels to enter or exit.

Before explaining a move, separate three observations: the last completed trade, the current bid and ask, and the quantities waiting behind them. A cancelled best quote can change the spread without producing a new trade. The last traded price changes only when another trade occurs.

The model cannot tell you why someone traded, what the company is worth or whether the next price will rise. This frozen book also misses new arrivals, cancellations and quantities not shown on screen. Chapter 02.02, Inside the Order Book, is planned to inspect those limits more closely.