Definition
Market depth refers to the market's capacity to absorb large buy or sell orders without substantially moving the price. It's visualized through Level 2 quotes or order books showing bid and ask prices at multiple price levels with their corresponding quantities. Deep markets have substantial orders at many price levels, while shallow markets have limited orders that could be easily overwhelmed. Market depth is crucial for institutional investors and helps assess potential slippage for large trades.
Example
A deep market might show 50,000 shares available within $0.10 of the current price, while a shallow market might only have 5,000 shares in that range. Large orders in shallow markets move prices more.
FAQ
What is Market Depth?
The market's ability to sustain large orders without significant price impact.
Why is Market Depth important?
Market Depth helps investors evaluate market structure and make more informed decisions.