Depth of Market
Depth of Market
Depth of Market, aka the Order Book, is a window that shows how many open buy and sell orders there are at different prices for a security. Let’s say the current price is $1, the DOM will show how many orders there are at $0.90, $1.10, etc. It’s a great tool to see where the supply and demand levels are.
Understanding Depth of Market
The DOM measures the sizes of orders that need to be completed to move the market to the next price level. The greater the number of buy or sell orders open at a certain price level, the deeper the market is, and more orders need to be executed to move the market price, and vice versa.
Also, DOM informs traders of the number of shares that they can buy or sell without causing price changes. If a market is highly liquid with large groups of buyers and sellers, the market is usually deep, and executing a large order will not cause significant price changes. Conversely, if the depth of a market is low, a large number of orders will move the market price more considerably.
Factors that Impact Depth of Market
1. Tick size
2. Minimum margin requirements
3. Price movement restrictions
4. Trading restrictions
5. Market transparency
Example of DOM
Say a trader is tracking the DOM of Stock A. The shares might currently be trading at $1.00. But there are 250 offers at $1.05, 250 at $1.08, 125 at $1.10, and 100 at $1.12. Meanwhile, there are 50 offers at $0.98, 40 offers at $0.95, and 10 each at $0.93 and $0.92.
Seeing this trend, the trader might determine that Stock A is going higher. Armed with that knowledge, the trader can decide whether this is the right time to jump in and buy or sell the stock.
