Chapter 4

Order Types and Liquidity

Order types define how your intent reaches the matching engine. A market order says "fill me now at the best available price"; a limit order says "only fill at this price or better." Understanding the difference protects you from surprise slippage and helps you read liquidity conditions before committing size.

Exchanges expose the same primitives as traditional equities, plus crypto-specific variants like post-only and reduce-only for derivatives.

Common order types at a glance

Order type	Behavior	Best for
Market	Executes immediately at best available price	Speed when spread is tight
Limit	Rests on book until price reaches your level	Price control, maker rebates
Stop-loss	Triggers market/limit order when price hits stop	Downside protection on positions
Stop-limit	Triggers a limit order at stop price	Controlled exit in volatile markets

Liquidity is not uniform — thin books mean market orders move price, while limit orders may sit unfilled until volatility brings the market to you.

The bid-ask spread is the gap between the highest buy and lowest sell quote. Tight spreads signal deep liquidity; wide spreads mean each market order pays a premium. Market makers earn by quoting both sides and capturing spread, often receiving maker fee rebates from the exchange in return for consistent liquidity provision.

Advanced traders watch order book depth — how much size sits at each price level — to estimate impact before trading. On derivatives platforms, reduce-only orders prevent accidentally increasing exposure, and post-only orders guarantee maker status. These small flags matter when fees and funding rates compound over active strategies.