Market depth is the ability of the company to sustain fairly broad customer orders, without impacting the security level. It takes into account the total degree and range of open orders, which typically applies to individual security trading.
Market depth also refers to the number of shares that can be bought from a given corporation without causing price appreciation.
If the market is highly competitive to buy and sell and has a huge number of buyers and sellers, usually purchasing a lot of shares won’t lead to significant fluctuations in stock prices.
It typically appears as an online list of buy and sale orders; they are arranged by price point and revised to represent market demand in real time.
Although the data is still available at a fee, most trading platforms now offer some sort of show of market depth. This allows all parties trading in a security to see a complete list of purchase. And also, it sells orders pending execution along with their sizes — rather than just the best ones.
How Traders Use Market Depth Data
Market depth data lets traders assess where the price of a certain security could be going. For example, a trader may use market depth data to understand the spread of bid-ask for a security in a stock market. It goes along with the volume that accumulates above both.
Securities with a strong market reach should typically have a high volume and be relatively liquid. It allows traders to position broad orders without impacting share price greatly. Meanwhile, low-profile stocks may be transferred if a buy or sale order is big enough.
Data on the size of the real-time market allows markets to benefit from short-term demand fluctuations. For instance, if a company goes public for the first time, traders should stand by for strong buying demand. Then, it signals the newly-released company’s price could follow an upward trend.