An exchange, like the Luno Exchange, is simply a platform that connects potential buyers with potential sellers. It allows them to exchange things like products, stocks, currencies and in this case: cryptocurrency. Please note Luno doesn't buy or sell cryptocurrency, neither do we set the rate of exchange, we're simply a platform to connect buyers and sellers.
Sell orders and asks
On the one side of the Luno Exchange, there is a seller. The seller has Bitcoin (BTC) and is interested in selling it for local currency, in this case South African Rand (ZAR). The seller goes to the Luno Exchange and makes a BTC deposit. They have 1 BTC they are interested in selling. They then create an order to sell their 1 BTC with the instruction of “I want to get 7000 ZAR for my 1 BTC” - this is called an ask. This is known as market making, since they are making an order and adding liquidity to the Luno Exchange (in the form of the BTC which hasn't been traded).
Buyers and bid order
On the other side of the exchange, you have a potential buyer. The buyer goes to the Luno Exchange, makes a local currency deposit, the money to be used to buy BTC. Now the buyer can do one of two things:
1. They can close an existing order (pay the 7000 ZAR for 1 BTC), or they can create a new order (called a bid) by saying, for instance: “I only want to pay 5000 ZAR to buy 1 BTC”
2. Creating a new bid order. This is also seen as market making, since they are adding liquidity to the exchange in the form of the local currency, not yet traded.
So now, we have two orders on the exchange. On the one side someone is saying that they will only sell their 1 BTC for 7000 ZAR and on the other side someone is saying that they will only buy 1 BTC for 5000 ZAR. In this scenario the market hasn’t met, since the buyer and seller don’t agree on the price. The buyer wants to pay too little (in the seller’s view) and the seller is asking too much for their BTC (according to the buyer).
More supply & demand
As long as there is supply and demand for the items being bought and sold (BTC and local currency) more buyers and sellers will go to market and create their own orders, at prices higher or lower than the previous orders. Eventually, the point will come where the market meets, where there is a buyer and a seller that agrees on a price.
So, let’s say we have another seller with 1 BTC and they say: “I have 1 BTC I want to get 6000 ZAR for it”. Along comes a buyer that says: “I want 1 BTC and I will pay 6000 ZAR for it.” In this scenario, the buyer will get what they want (1 BTC), the seller will get what they want (6000 ZAR) and that specific order is closed. The market has been met.
The previous orders will still be open until a buyer, willing to spend 7000 ZAR and a seller, willing to accept 5000 ZAR for those trades, comes along.
One thing to note is that in order to provide these exchange services, platform integration, customer support, security and make sure that the people trading on the exchange are credible, the platform (in this case Luno) will charge a small fee.