Reading an Order Book Properly
A book is more informative than a price. How to weight it, what a lopsided book means, and the patterns that tell you a quote is not to be trusted.
The price is a summary. The book is the data. Learning to read one takes about ten minutes and changes how much confidence you place in any quoted number.
What a book shows
Resting buy orders below, resting sell orders above, each with a size. The highest bid and lowest offer define the spread; everything behind them is depth.
The size-weighted mid
The naive mid is the average of best bid and best offer. It assumes the two sides are comparable, and frequently they are not.
Bid 60 for 4,000 contracts. Offer 64 for 30. The naive mid is 62. But there is an enormous amount of interest at 60 and almost none at 64, so the price at which trading would actually happen is much closer to 60.
Weighting the mid by size at the top of book gives a more honest number. This matters most for cross-venue comparison, where an unweighted mid on a lopsided book produces a gap made entirely of one thin quote. This site uses a size-weighted mid for exactly that reason. The methodology.
Imbalance as information
A book with much more size on one side is telling you something, though less than people assume.
Genuine pressure. Real interest accumulating on one side. Modestly predictive of direction over short horizons.
A single large participant. One order, not a consensus. Disappears when they change their mind.
Deliberate display. Size shown to influence others, cancellable at any moment.
Treat imbalance as weak evidence and never as a reason to override a view.
The patterns that should stop you
A one-sided book. Bids but no offers. Any mid you compute is invented, and any cross-venue gap derived from it is fiction. Exclude these entirely.
A huge spread. Bid 30, offer 70. The market is saying nobody knows. A mid of 50 carries no information.
Tiny size at the top with a large gap behind. 62 offered for five contracts, then nothing until 71. The top of book is decoration.
A book that has not changed in hours. Nobody is maintaining these quotes. They are live in the sense that you could trade against them and dead in the sense that nobody has thought about them since yesterday. Stale quotes and timing.
Checking Yes against No
On a venue quoting both sides separately, the best bid on Yes plus the best bid on No should be a little under a dollar, and the two best offers a little over. The gaps are the spreads.
If that relationship is badly broken, one side is stale. It is almost never an opportunity, and it is a useful automated check on data quality. Yes and No shares.
Using a book to size
The book tells you the largest position you can take without paying too much. Compute the average fill for several candidate sizes and find where it starts to degrade.
That number, not your conviction, is your maximum size. Depth and slippage and position sizing.
For anyone building on this
Store the top several levels on each side, not just the best quote. Depth is what separates a usable liquidity filter from a guess, and it is the field most people fail to record until they need it historically and cannot get it. Historical price series.
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Educational content only. Nothing here is financial advice, a solicitation, or an offer to trade. Prediction markets can move against you and a position can lose its entire value. Where this guide describes a difference between venues it describes a theoretical cross-market edge in observed prices, which is not a profit: fees, spreads, capital lockup, transfer time and differing settlement rules all come out of it first.
Keep reading
Order Books and Liquidity · 3 min readLimit Orders, Market Orders, and the Real Trade-OffCrossing the spread costs money you can measure. Waiting costs money you cannot. A practical guide to choosing, with the missed-fill cost included.
Order Books and Liquidity · 3 min readThin Market Warning SignsA checklist for spotting a market whose price is not a forecast, before you quote it, compare it or build anything on top of it.
Order Books and Liquidity · 3 min readVolume and Open Interest Are Not the Same NumberOne counts how much changed hands, the other counts how much is outstanding. They tell you different things and conflating them misreads a market badly.
Data and Automation · 3 min readHistorical Price Series and Their PeculiaritiesEvent contract history is not like equity history. Fixed bounds, a settlement point, irregular trading and a survivorship problem built into the data.