Market depth is a measure of the liquidity of a market for a particular security, based on the number of standing orders to buy (bids) and sell (offers) at various price levels. It is a real-time list that displays the quantity to be sold versus unit price, organized by price level and reflective of real-time market activity. Market depth is closely related to liquidity and volume within a security, but does not imply that every stock showing a high trade volume has good market depth.
Factors that influence market depth include tick size, allowable leverage, and market transparency. Tick size refers to the minimum price increment at which trades may be made on the market, and changes in tick size can affect market depth. Allowable leverage is set by major markets and governing bodies, and while it may stabilize the marketplace, it decreases market depth by preventing participants from taking on very high leverage without providing more capital. Market transparency can also affect market depth, as additional information about the size of offers and pending bids or offers that are not the best may be hidden for reasons of technical complexity or simplicity.
Market depth can be evaluated by looking at the order book of a security, which consists of a list of pending orders to buy or sell at various price levels. The orders that populate a securitys order book at any given point in time are the derivative of market depth. Market depth data helps traders determine where the price of a particular security could be heading, and enables them to anticipate market movements and make more informed trading decisions.
To view market depth, traders can use a market depth screen that displays the best 5 bids and offers and additional data points like open, high, low, close (OHLC), volume, circuit limits, and the price of an instrument. The market depth screen shows the quantity available for buying or selling at a particular price, the number of orders pending at that particular price on the exchange, and other relevant information.
