Market Depth - Definition, What is Market Depth, Advantages of Market Depth, and Latest News - ClearTax (2024)

Definition of Market Depth

Market complexity is the ability of the market to maintain relatively large market orders, without affecting the security price. Market depth takes into account the overall level and scope of open orders, which usually refers to individual security trading.

Understanding Market Depth

Market depth within security is closely related to liquidity and volume but doesn't imply that every stock which is displaying a high volume of trades has a good market depth. There could be an imbalance of orders large enough on any given day to create high volatility, even for inventories with the highest daily volumes.

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

Market depth also refers to the number of shares that can be purchased from a given company without triggering price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, buying a bulk of shares won't lead to noticeable movements in stock prices.

Usage of Market Depth Data

Market depth data helps traders determine where the price of specific security might be headed. Securities with strong market liquidity would, typically, have a high volume and be relatively liquid, allowing traders to position large orders without impacting market price significantly. Meanwhile, if a buy or sell order is big enough, securities with a low depth could be transferred.

Data on the depth of the real-time market allows traders to profit from short-term price volatility. For instance, if a company goes public (begins trading for the first time), traders can stand by for strong purchasing demand, signalling the newly public company's price could continue an upward track.