Market Depth is a characteristic of a given market and its ability to handle large order sizes without materially affecting the price of the underlying asset or currency pair.
Broad-based definitions of market depth characterize it as a function of liquidity and trading volume.
In its most simplistic sense, market depth reflects a real-time list displaying the quantity to be sold versus unit price.
This in turn is organized by price level and is reflective of real-time market activity.
In theory, market depth is the size of an order needed to move the market price by a given amount.
In practice market depth depends on the amount of open orders in a given market, which provide liquidity for order execution.
What Determines Market Depth?
While some brokers may be quoting better prices at first glance, the depth of book metric determines how frequently clients can hit the levels that are quoted.
As a result, the real execution price may differ, provided that the clips traded are in significant size.
Several factors influence market depth. This includes variables such as tick size, or the minimum price at which trades made be executed.
In addition, trading restrictions or active limits, permissible leverage constraints, and price movement barriers are also determining factors of market depth.
One of the most important elements of market depth is the level of transparency associated with a given market.
For example, the latest bid and asking prices are typically public knowledge and made available to most participants.
However, additional information regarding the size of these offers and pending bids or offers that are not the best can be hidden for a number of reasons.
Any absence of available information can also affect the overall willingness of participants to add market depth as well.