Ethereum: What happens if an exchange’s order book only has market orders? [closed]

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

Imagine a Bitcoin exchange that offers market orders is set up. Let’s say they have X orders to buy at the market price and Y orders to sell at the market price (no limit orders). Let’s say we’re talking about a case where a buyer places a market order on the exchange.

What happens next?

• Matching

  

  : The exchange’s algorithm will automatically match the market orders to create new trades that match both sides of the order book.

• Price Determination: Since there are no limit orders, the price at which these trades are settled is determined solely by market supply and demand.

How ​​does it work?

In this scenario:

• The buyer places a market order for an amount in Bitcoin (e.g. 1 BTC).

• The exchange algorithm automatically matches this order to create a new trade:

• Buy side order with the same amount of BTC (say 1 BTC) and a market price of $30,000.

• Sell order with the same amount of BTC (say 1 BTC) and a market price of $20,000.

Prices

The exchange algorithm will determine a new price at which these transactions will be matched. In this example:

• A buy side order is matched to create a trade when you buy 1 BTC at a price that is the midpoint between $30,000 and $20,000 (say $25,500).

• A sell order is also matched to create a new trade when you sell 1 BTC at a price that is higher than what you paid for it ($35,000).

What if there were no limit orders on either the buy or sell side?

If there were no limit orders on either the buy or sell side, prices would be set by the most active traders in the market. In this case:

• The trade may not close at $25,500 because several dealers are bidding above and below that price.

• The market may become more volatile as traders take advantage of imbalances.

Conclusion

In summary, when a market order is received on the exchange’s order book, it will be automatically matched with other orders to create new trades. The prices at which these transactions are negotiated depend solely on market supply and demand, without taking into account limit orders or other factors that may affect pricing.