Add, Cancel And Execute: The Event Alphabet

An exchange does not send you a picture of the order book. It sends you a stream of small messages, and it is your job to turn that stream into a book. Almost every message on almost every exchange is one of four things: an order arrives, an order leaves, an order is matched, or an order's terms change.

Add. A new limit order joins the book. The message carries an order ID, side, price and size. Nothing trades — the order just takes a place in the queue at its price level.

Cancel. A resting order is pulled, in whole or in part. The size at that price level drops by exactly the cancelled amount. A cancel-replace is common in practice: a trader pulls an order and adds a new one in the same instant, usually to move price or add size, and it costs the order its queue priority (see Queue Position and Priority).

Execute (trade/fill). An incoming order matches a resting one. Size is removed from the resting side, and — this is the detail beginners miss — the size removed is taken from the front of the queue, not averaged across it.

Modify. Some venues allow an in-place size decrease without loss of priority (you can only shrink, never grow, and never move price). A price or size increase is always a cancel-replace.

Walking a book through a message sequence

Start with an empty book at 100.00/100.01. Five messages arrive in order:

1. Add buy 500 @ 100.00 (order A) → bid queue: [A:500]
2. Add buy 300 @ 100.00 (order B) → bid queue: [A:500, B:300], total 800
3. Cancel A, 200 shares → bid queue: [A:300, B:300], total 600. A keeps its place at the front; only its size shrank.
4. Execute: an incoming sell for 400 hits the bid → the engine eats A first (300 filled, A gone), then B (100 filled, 200 left) → bid queue: [B:200]
5. Add buy 150 @ 100.00 (order C) → bid queue: [B:200, C:150], total 350

Notice step 4: the trade print says "400 @ 100.00", but it was really two fills against two different resting orders, in strict time priority. A book reconstructed from trades alone would never know that — you need the message stream.

Every book-reconstruction bug traces back to mishandling one of these four events, usually cancels: forgetting that a cancel can be partial, or applying it to the wrong price level after a modify. See Rebuilding The Book From A Message Feed for how to build the full pipeline.