In this article, We learn about "Central Limit Order Book (CLOB) ".Let's Go!
A Central Limit Order Book (“CLOB”) is a trade execution model based on matching customer orders (bid and ask Transparent system of price) based on "price/time priority".
Outstanding buy or sell quotes are stored in a queue and filled in priority order by price and entry time.
The price/time priority principle refers to how orders are executed first.
Orders are prioritized by price. Orders at the same price will then be ranked based on entry time.
The highest ("best") bid and the lowest ("cheapest") sell make up the best available market price.
Clients can regularly cross the bid-ask spread and benefit from low-cost execution. (You can enter a limit order "between" the bid and ask prices.)
They can also see Market Depth or “Stack” where clients can view bid orders of various sizes and prices on one side instead of viewing various sizes and The quote order price for the price is on the other side.
CLOB is by definition completely transparent, real-time, anonymous and low-cost to execute.
The use of CLOB is common for highly standardized securities and small trade sizes.
In CLOB mode, customers can trade directly with dealers, and dealers can trade with other dealers.
Best of all, customers can trade directly and anonymously with other customers.
CLOB and RFQ
The opposite of the CLOB method is the Request for Quote ("RFQ") trading method.
RFQ is an asymmetric trade execution model.
In this method, the client queries a limited set of participating market makers who quote/offer prices to the client (the "Market").
Customers can only "Meet Bid" (sell to the highest bidder) or "Raise Bid" (buy from the cheapest seller).
Clients are prohibited from intervening in bid/ask spreads and attempting to reduce execution fees.
Contrary to the CLOB model, customers can only trade with dealers. They cannot transact with other customers.
Most importantly, They can’t create the market on their own.
When more market participants can compete for order flow, trade execution costs are lower compared to sending orders to a limited number of market makers with (potentially) non-competitive quotes.