Bid-Ask Spread & Market Depth: Order Book Liquidity

1. Market Microstructure Fundamentals

In electronic financial markets, transactions occur within the continuous double auction framework of the Central Limit Order Book (CLOB):

• Bid: The highest price an incoming buyer is willing to pay.
• Ask (Offer): The lowest price an incoming seller is willing to accept.
• Bid-Ask Spread: The difference between the best bid and best ask ($ ext{Spread} = ext{Ask} - ext{Bid}$).

2. Market Depth & Liquidity Tiers

Market Depth measures the total volume of limit orders queued at each progressive price level above the best ask and below the best bid in the Level 2 book. In deeply liquid markets (such as CME E-mini S&P 500 futures), thousands of contracts sit within 1 tick of spot price, minimizing institutional market impact slippage.