How To Read Market Depth

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Market Depth

What is Market Depth

Market depth is the market’s ability to sustain relatively large market orders without impacting the price of the security. Market depth considers the overall level and breadth of open orders and usually refers to trading within an individual security.

BREAKING DOWN Market Depth

Market depth is closely related to liquidity and volume within a security, but does not mean that every stock showing a high volume of trades has good market depth. On any given day there may be an imbalance of orders large enough to create high volatility, even for stocks with the highest daily volumes. The decimalization of ticks on the major U.S. exchanges has been said to increase overall market depth, as evidenced by the decreased importance of market makers, a position needed in the past to prevent order imbalances.

Market depth is a property of the orders that are contained in the limit order book at a given time. It is the amount that will be traded for a limit order with a given price (if it is not limited by size), or the least favorable price that will be obtained by a market order with a given size (or a limit order that is limited by size and not price). Although a change in price may in turn attract subsequent orders, this is not included in market depth since it is not known.

For example, if the market for a stock is “deep”, there will be a sufficient volume of pending orders on both the bid and ask side, preventing a large order from significantly moving the price.

Depth of market also refers to the number of shares, which can be bought of a particular corporation, without causing price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk of shares typically will not result in noticeable stock price movements.

Market depth usually exists in the form of an electronic list of buy and sell orders; these are organized by price level and updated in real time to reflect current activity. While at times, the data is available for a fee, most trading platforms now offer some form of market depth display. This allows all parties trading in a security to see a full list of buy and sell orders pending execution, along with their sizes—instead of simply the best ones.

How Traders Use Market Depth Data

Market depth data helps traders determine where the price of a particular security could be heading. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures. Securities with strong market depth will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting market price. Meanwhile, securities with poor depth could be moved if a buy or sell order is large enough.

Real-time market depth data allows traders to profit from short-term price volatility. For example, if a company goes public (begins trading for the first time), traders can stand by for strong buying demand, signaling the price of the newly public firm could continue an upward trajectory.

Depth of Market (DOM)

What Is Depth of Market – DOM?

Depth of market – DOM is a window that shows the number of open buy and sell orders for a security or currency at different prices. The depth of market measure provides an indication of the liquidity and depth for that particular security or currency. The higher the number of buy and sell orders at each price, the higher the depth of the market. This data is available from most exchanges, often free of cost but sometimes for a fee.

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Depth of market data is also known as the order book since it shows pending orders for a security or currency. The book records the list of buyers and sellers interested in a particular security. There is also a matching engine that uses the book to determine which trades can be made.

Depth of Market – DOM Explained

In addition to measuring supply and demand, market depth is also a reference to the number of shares which can be bought of a particular corporation without causing price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk number of shares typically will not result in noticeable stock price movements. However, if the stock is not particularly liquid and doesn’t trade as often, purchasing a block of shares will have a more noticeable impact on the stock price.

Depth of market is typically represented as an electronic list of all outstanding buy and sell orders; these orders are organized by price level and updated in real-time to reflect all current activity. A matching engine pairs up compatible trades.

While at times the data is available for a fee, now most trading platforms offer some form of market depth display. This allows all parties involved in the transaction of a security to see a full list of buy and sell orders pending execution, along with the size of the trade – instead of simply just the best options.

Key Takeaways

  • Depth of market, or DOM, is a trading tool that shows the number of open buy and sell orders for a security or currency at different prices.
  • DOM, also known as the order book, is essentially a measure of the supply and demand for a particular security.
  • DOM also refers to the number of shares that can be bought of a particular stock without having an impact on the price.

Using Depth of Market Data

Depth of market data helps traders determine where the price of a particular security could be heading in the near future as orders are filled, updated, or canceled. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures. Securities with strong depth of market (e.g. a highly popular large-cap company like Apple (AAPL) will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting market price. Yet those securities with poor depth (more obscure companies with smaller market capitalizations) could be moved if a trader places a large buy or sell order.

Being able to view the depth of market information for a particular security in real-time allows traders to profit from short-term price volatility. For example, if a company goes public (begins trading for the first time), traders can stand by for strong buying demand, signaling the price of the newly public firm could continue an upward trajectory. In this case, a trader might consider buying shares and selling them once appreciation has reached the desired level and/or if the trader observes selling pressure mounting.

Real-World Example

For example, if a trader is tracking Stock A, they might look at the buy and sell offers for the company on a depth of the market screen. Stock A might currently be trading at $1.00, but there are also 250 offers at $1.05, 250 at $1.08, 125 at $1.10 and 100 at $1.12. Meanwhile, there are also 50 offers at $0.98, 40 offers at $0.95, and 10 each at $0.93 and $0.92. Looking at this trend, the trader might determine that the market is pricing in Stock A going a bit higher. Armed with this knowledge, the trader can decide whether or not this is the right time to jump in and buy, sell or take other action.

Customizing the Market Depth Display

There are several Market Depth display settings you can customize to see exactly the information you need. All can be found by right-clicking in the Market Depth or Time & Sales area and selecting Market Depth Settings.

  • Scroll bars: To display a scroll bar in the Bid, Ask, or Time & Sales columns, right-click in the column and select Show Scroll Bars.

Sort quotes by Size to see the largest quotes first at each price level. If multiple quotes are the same size, the older quotes will get higher priority.

Sort quotes by Time to display quotes from oldest to newest regardless of size.

Displays an aggregate size at each price levels above the bid and ask columns.

  • Aggregate quotes show the number of shares being quoted at each price level. The size is the sum of all of the individual market maker/ECN quotes at that level.
  • Increase or decrease the number of aggregate levels shown by clicking and dragging the divider bar between the aggregate and Market Depth areas.

If unchecked, the full volume for a quote will display. If checked, the quote will display without the last two zeros to save screen space.


Displays the inside bid/ask as “NBBO” at the top of the bid and ask columns.

Update during extended hours: If checked, Level 1 data will update during extended hours trading. If unchecked, it will freeze at the close price.

If you have multiple Market Depth displays and want different settings for each, choose Apply to this instance.

To have these settings apply to all Market Depth displays in your layout (and all future Market Depth displays you add), choose Apply to all instances.

Copyright © 2020 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0511-3126)

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Market Depth Settings
Market Depth Behavior
Sort quotes by Size or Time
Display Scrollbars Displays scrollbars in each column enabling you to see the full depth of the bid or ask, or to see time & sales data from further back.
Display Aggregated Quotes
Display quote volume in 100’s
Data Sources
NBBO (National Best Bid and Offer)
ARCA Book If checked, displays the ARCA book data in lower case text, so you can distinguish between which quotes are only in the ARCA book and which quotes the whole market can see.
Nasdaq Market Depth
Nasdaq Level II/Exchange Best Only displays a market maker or exchange’s best bid and ask quote rather than every quote at every price level in their books.
TotalView (NSDQ Book) If checked, displays the NSDQ book data in lower case text, so you can distinguish between which quotes are only in the NSDQ book and which quotes the whole market can see.
Bid/Ask Columns
Display:
  • Venue/Market Center
  • Price
  • Size
  • Quote Change Arrow Activates small up / down arrows in the Market Depth area of the Trading window indicating the direction a market participant just moved in relation to the inside price.
    EXAMPLE If Market Maker ABCD is on the bid at 65.20, but backs off to 65.17, a down arrow will appear at the new price level. If ABCD moves back up to 65.20, an up arrow will appear.
  • Bid/Ask Status Shows the current status of the Market Maker. “K”=closed, “O”=open, “L”= open (non-refreshed) in the morning and closed in the evening.
  • Bid/Ask Time Displays in Market Depth the time that the price server received the quote.
Display in Time & Sales
Display:
  • Time Displays the time of each print
  • Bid/Ask Changes Highlights bid/ask quote changes in the Time & Sales panel

Time & Sales is color-coded:

  • Green: Prints at the inside Ask
  • Red: Prints at the inside Bid
  • Gray: Prints in between the inside Bid/Ask
  • Yellow: Prints above the inside Ask
  • Purple: Prints below the inside Bid
  • Gray Highlight: Inside quote change
Watches
Watch ARCA and NSDQ Highlights ARCA and NSDQ quotes in the Market Depth.
Watch Market Participants Enter up to 4 market makers or ECNs to highlight in the Market Depth.
Apply settings to.
this instance or All instances