Understanding Order Books

Chatter of Order Books and Buy and Sell Orders has been around for six months or so now. But unless you have experienced them in other forms of trading (and most people haven’t!) you might be wondering what to expect. In this article I’ll share my experience of Order Books and think about how they might be used on the Football Index.

From the picture shared by the Index of the beta (above), it looks like they are planning on a fairly standard Order Book with the usual features I would expect.

But obviously, I have almost zero details on exactly how the Football Index will implement it.

I’ll therefore be basing the discussion on the standard features common to most Order Books. and I’ll update this article if and when more details emerge.

The Basics

What is an Order Book?

An Order Book on the Index would be a list of the number of “buy orders” and “sell orders” that exist for each player. Usually it would also show the number of shares bid for or offered at each price. Some platforms identify which trader is behind the buy and some keep that anonymous.

Using an Order Book, we should be able to place Buy and Sell Orders and possibly read the Order Book to get much greater insights into where the money in the market is going than we currently do.

Buy and Sell Orders

Buy and Sell Orders let you set instructions to buy or sell a specific number of shares when the price reaches a certain level.

For example, renowned attacking flair player Buzzy McBuzzface is sitting at £10. I think he is too expensive but I’d be happy to buy him at £9.50. With a Buy Order, I’d be able to set instructions to buy a set number of shares when the price drops to my specified level or less.

Once you place the order, your money will be set aside to back it up. You won’t be able to spend it on other players. You can however cancel the order if it has not yet been filled at any time. Other traders will be able to see that an order exists and someone is willing to buy at this price.

It works the same for selling. I may hold McBuzzface and think that £10.50 is a good time to take profits. Rather than constantly monitoring it all day and waiting for that to happen I can set a Sell Order to automatically sell all of or a portion of my shares when my target price is hit.

So how would I use this on the Index?

Selling at Intervals

A common (and very effective) trading strategy is to set interval points. For example, I may be fairly confident when buying a player at £5 that I will make money, but I might want to protect myself if it doesn’t go my way. This would be ideal if I was speculating on an uncertain event like a transfer that may or may not happen.

I could set up the following orders:

Sell 100% at £4.78

Sell 25% at £5.47

Sell 25% at £5.73

Sell final 50% at £5.98

In this trade, I plan to enter at £5 and exit at £4.78 if it goes badly and limit my losses. If it goes well, I will gradually take profits and bank them as the price rises. This protects me if the price goes down again because I will have already locked in some profit.

Of course, it is important to note that this all assumes that other traders have active buy orders to take them off my hands. If nobody is buying, my sell orders will not execute.

I could continually adjust this to react to news. So if my £5.47 sell is triggered, I will amend my £4.78 sell point to £5.22 to help ensure I exit the trade with a solid profit.

I may also decide at some point that I can get more than £5.98 and push that up too. As long as the order hasn’t been executed I can cancel it whenever I want.

Why don’t I use round numbers? Because I want to improve the chances of my trades actually being executed. To do that, you have to be slightly less greedy than the other guy who is selling.

Most people tend to stick to round numbers like £6, so by selling at £5.98 you jump the queue a bit. This little tax is worth paying because not having an order filled can be very expensive.

Managing Risk

Let’s say my star man is in action but I cannot keep checking my phone that night, at least if I don’t fancy becoming single. Or maybe I am away on holiday and can’t trade. I can set an order to sell if the price drops dramatically due to some misfortune.

However, it is important to remember that these orders will only work if someone else is willing to buy. To minimise the chance of not getting my order filled, I’d want to set a reasonable price and not be too greedy.

Still, whilst there is the risk of the order not being filled, as things stand I would not have any chance of selling at all without constantly refreshing my phone.

So, it is better than nothing and I can enjoy my night out or holiday with a bit more peace of mind. A welcome addition to the Index for sure.

What changes could buy and sell orders bring to the Index?

The Snowball Effect

The Index can be volatile as it is. I still remember watching Salah’s price live when he had to go off in the Champions League Final and it was eye watering stuff. That is the effect of all traders who are currently watching the game reacting.

Imagine that multiplied by far more traders who were not watching but had set specific sell orders. As people watching live sell, more and more sell orders will get triggered and it can go like wildfire.

On the flipside, new predators will emerge who will set cheap buy orders to hoover up cut price assets who get rapidly oversold during a panic. This comes with a danger for people doing that though.

For example, you could set a really cheap buy order in case a player you want drops dramatically. You could get him at your heavy discount but if the reason for the drop was a broken leg that sees him out for a season, you might be pretty unhappy with that!

Market Manipulation Shenanigans

With an Order Book, you will be able to see how many people are interested in a player and how much they are willing to pay. This will create a whole new field of Index analysis as rather than trying to gauge who is popular from social media hype, you will be able to see where the money really is. This creates welcome transparency but also opportunities for shenanigans.

Get used to hearing the terms “buy wall” and “sell wall”.

A buy wall would be a great sign for a player as it means the buy requests are exceeding the sell requests.

The buyers will have to pay more to tempt people to sell and the price will go up. A sell wall is the opposite and sellers have to lower their price to lure buyers in.

Traders will love to see a big buy wall because it suggests people are feeling good about the player and want in. Likewise, a big sell wall shows traders are twitchy and want out.

But not so fast. We should definitely use this information but remain sceptical because it is ripe for manipulation. For example, it is very common for fake buy and sell walls to be set up.

A whale (or trading group) with a lot of cash may want to make it look like a player is in demand by placing large buy orders that he has no intention of following through with. He will buy some shares and create fake orders for many more.

When others start to buy as they see the price going up and plenty of “demand” on the order book he will dump his shares at a profit then remove his fake buy orders.

There are far too many shenanigans to cover here, but the above is an example of the sort of things traders are going to have to get used to dealing with. I could fill an entire article discussing trading shenanigans and maybe I will in future.

Trading Bots

Whenever you introduce new tools like this, it is 100% certain that some people will exploit them. Based on previous actions and statements, I think the Football Index need to take this issue more seriously. They seem to basically think it is too hard to do much about bots.

I think this is a major risk to people’s trust in the platform because people can accept being out-played by other traders but if they get done over by bots it is unfair and infuriating. We already see them in use on IPO buys. It is technically possible to make it hard for bots to operate and I would urge Mr Cole to take steps before it becomes a threat to the Index’s reputation.

You can expect trading bots to be constantly nibbling at the edges of prices hoovering up

3-4% profits here and there. This will create problems particularly for short term traders as the bot is just going to be faster than a human.

But bigger manipulations will also happen. It will not be hard for example with a big stack of cash to have your bot start pumping a player, wait for others to pile on and then dump. This is often combined with social media campaigns from those connected to the bot to big up the player who is rising. So people will need to be extra vigilant.

Conclusion

There are a ton of positive and exciting uses for an Order Book on the Index. But it also creates opportunities for it to be used by savvy and even manipulative traders to run rings around the inexperienced.

The Index will have to think carefully about whether the Order Book will be anonymous. Having names visible will make it significantly easier for the community to spot frequent manipulators.

But many will be uncomfortable having their name on display. I would suggest giving people an anonymous ID number that doesn’t give details away but allows manipulators to be more easily spotted.

There is a concern that this is just another thing that baffles new traders. But I would say that when joining the Index from a trading background, I was very surprised to see a lack of an Order Book so it is hard for the Index to claim to be a “real” trading platform without one.

An Order Book would have many great uses though and it all depends on how the Index implement it.

If anyone at Football Index is reading I would suggest the guideline is: the simpler the better.


If you find this post useful please like the post on Twitter or share using the below buttons. You can also follow me on Twitter at @_FI_trader for additional daily thoughts and tips.

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