Market Depth
IntermediateMarket depth is a measure of how much of a security can be bought or sold at or near the current price without significantly moving that price, based on the volume of buy and sell orders at different prices.
Market depth is visible in the order book. A market with good depth has many large orders close to the current price on both the buying and selling sides. A shallow market has few orders, so a large trade may move the price significantly.
For example, a large company’s shares might have orders for hundreds of thousands of shares within a few cents of the current price, allowing a fund to buy a large amount with little price impact. A small company’s shares might have only a few thousand shares on offer near the current price.
Market depth is related to, but not the same as, liquidity and trading volume. A security can trade heavily but still have thin depth at certain moments, especially during periods of stress.
Traders and investors consider market depth when planning large trades, often splitting orders into smaller pieces or using algorithms to reduce their impact on prices. Depth can disappear quickly during market turmoil, as orders are withdrawn.
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