Market Depth
What It Is
Market depth measures the volume of buy and sell orders at different price levels, showing how much liquidity exists beyond the best bid and ask.
Why It Matters
Deep markets absorb large orders with minimal price impact, while shallow markets are more prone to volatility.
How It Works
- Order books display multiple price levels
- High depth → stable prices
- Low depth → larger slippage
- Depth changes throughout the trading day
Key Components
- Order book levels
- Liquidity tiers
- Slippage risk
- Market stability
Example
A stock with thousands of shares available at each price level has strong depth, reducing the impact of large trades.
Key Takeaways
- Depth reflects true liquidity beyond headline quotes.
- Shallow depth increases volatility.
- Traders monitor depth to manage execution risk.