So what is Market Depth?

    Market depth is the ability of the market to absorb relatively large market orders without significantly affecting the price of a security. Market Depth takes into account the overall level and breadth of open orders, bids, and offers, and usually refers to trading within an individual security. Generally, the more buy and sell orders that exist, the greater the depth of the market—provided these orders are fairly evenly distributed around the current market price of that security.

Understanding Market Depth

    Market depth is closely related to liquidity and volume within a security, but does not mean that every stock showing high trading volume has good market depth. Market depth can be assessed by looking at the order book (glass) of a security, which consists of a list of pending buy or sell orders at various price levels. On any given day, an imbalance of orders large enough to create high volatility can occur, even for stocks with the highest daily volumes.Market depth is the derivative of all orders that fill the order book (glass) of a security at any given time. This is the amount that will be traded for a limit order at a given price, if not limited by size or the least favorable price, that would be received by a market order with a given size or a limit order that is limited by size and not by price.While price change may in turn attract further orders, this is not included in market depth as it is unknown. For example, if the stock market is "deep", then there will be enough pending orders on the bid (sell price) and ask (buy price) sides, which will not allow a large order to significantly move the price.Market Depth also refers to the number of stocks that can be bought without causing prices to rise. If a stock is extremely liquid and has a large number of buyers and sellers, buying most of the stock will usually not cause a noticeable movement in the stock price.

How to use market depth?

   Market depth data helps traders determine where the price of a particular security might be heading. For example, a trader can use market depth data to understand the bid-ask spread as well as the volume accumulating above both figures.Real-time market depth data allows traders to profit from short-term price volatility. For example, if a company goes public and starts trading for the first time, traders may be ready for strong buying demand, signaling that the price of the new public firm may continue its upward trajectory.Stocks with a large market depth tend to be popular large-cap companies. They usually have strong volumes and are quite liquid, which allows traders to place large orders without having a significant impact on their market prices.

Market Depth Example

   Let’s say a trader is tracking the price of stock A. The stock may currently be trading at $1.00. But there are 350 offers for $1.25, 270 for $1.18, 135 for $1.12, and 130 for $1.113. meanwhile, there are 70 bids at $0.999, 60 bids at $0.96, and 20 bids each at $0.94 and $0.93. Seeing this trend, a trader can determine that stock A is going higher. Using this information, a trader can decide if this is the right time to buy or sell a stock.
Real time market depth tool