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What happens to the order book when a market order is received

Imagine that a bitcoin exchange is established to sacrifice market orders. Let’s say they have X purchase X at the market price and sell orders at the market price (without limit orders). Now, let’s say we are talking about an instance in which a buyer makes a market order with the exchange.

** What happens next?

• Ansignation : The exchange algorithm will automatically coincide with market orders to create new exchanges that meet both sides of the request book.

• Determination of the price

  : Since there are no limit orders, the price at which these operations are combined is determined only by the demand and the market supply.

** How does it work?

In this scenario:

• The buyer makes a market order with an amount of bitcoin (for example, 1 BTC).

• Exchange’s algorithm automatically coincides with this order to create a new trade:

* A secondary purchase order with the same amount of BTC (say 1 BTC) and a market price of $ 30,000.

* A secondary sales order with an equal amount of BTC (say 1 BTC) and a market price of $ 20,000.

Price determination

The exchange algorithm will determine the new price in what these operations coincide. In this example:

• The purchase purchase order is combined to create an exchange in which you are buying 1 BTC at a price that is the midpoint between $ 30,000 and $ 20,000 (let’s say $ 25,500).

• The sale of sale also corresponds to create a new operation where 1 BTC sells at a higher price than what it paid for it ($ 35,000).

** What would happen if there were no limit orders on the sides of purchase or sale?

If there were no limit orders on the sides of purchase or sale, prices would be determined by the most active operators in the market. In this case:

• The operation may not close at $ 25,500 because multiple merchants are making an offer from top to bottom for that price.

• The market could become more volatile as merchants take advantage of the imbalance.

Conclusion

In summary, when a market order, received in the order book of an exchange, will automatically be equal to other orders to create new operations. The prices to which thesis operations coincide solely with the demand and supply of the market, without any consideration for the limit orders or other factors that could affect prices.

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