CLOB establishes a balance between the highest price that buyers are willing to pay and the lowest price that sellers are willing to accept. When a buyer wants to purchase an asset at a specific price, they enter that order into the Limit Order Book and it goes on hold. Similarly, when a seller wants to sell an asset at a specific price, the sell order is entered into the Limit Order Book.

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How does Limit Order Book (CLOB) work?

1. Entry of Buy and Sell Orders: Buyers, sellers, or brokers can enter buy or sell orders for a specific asset. A buy order represents orders wanting to buy an asset at a specific price level, while a sell order represents orders wanting to sell an asset at a specific price level. Orders aiming to trade at a specific price are Limit Orders.
2. Orders are Ranked: The Limit Order Book ranks incoming orders based on their price. Buy orders are usually ranked from the highest price to the lowest, and sell orders are ranked from the lowest price to the highest.
3. Best Prices are Determined: The CLOB constantly determines the highest buy price and the lowest sell price. These prices represent the best bids and offers in the market structure.
4. Matching and Execution of Trades: If a buy order matches with a sell order at the current lowest sell price or a lower price, a trade is executed. This trade combines the buyer’s demand and the seller’s offer.
5. Orders are Updated or Canceled: The Limit Order Book is continuously updated. New orders can be entered, existing orders can be modified, or canceled. As prices and offers change, the CLOB reflects the updated information.

The advantages of CLOB include transparency, competitive prices, market depth, and real-time transaction execution.

However, there are drawbacks to Limit Order Books. Their limited structure means that the range between the best buy and sell prices is constrained. Therefore, during sudden market fluctuations or large price movements, orders in the CLOB may be delayed or not executed at all.

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