Market Depth

What is the Market Depth when Trading?

Market depth refers to the degree of a market's ability to absorb large orders to sell or buy an asset without causing dramatic price fluctuations. It is one of the key liquidity measures, reflecting the level of balance between the asset supply and demand.

Key Aspects of Market Depth

What does market depth show?

• It's a real-time snapshot of all the buy and sell orders for a stock at different price levels.

• It is usually shown in an order book and serves to help traders understand the number of shares available at each price level.

Why does liquidity matter?

• A deep market is one in which there are numerous buy and sell orders, and large quantities can be traded without greatly affecting the price.

• A shallow market lacks enough orders, so even small trades can cause noticeable price swings.

How does it affect trading?

• Market depth is used by traders in predicting how their trade can have an impact on the prices.

• Deep markets are more liquid, which means that trading in them is more efficient—trades of large size generate little price movement, or slippage.

Stability of Price vs. Volatility

• High market depth is an indication of stability in prices because large trades are well absorbed.

• Low market depth propels more volatility, mainly because the action of small trades can easily turn and become a very significant deal to shift prices.