What is Market Depth?

Market depth is a list that shows how many shares people want to buy or sell at different prices. It updates constantly as traders place new orders.

On one side, you have buyers saying what price they'll pay. On the other, sellers saying what price they'll accept.

Market depth can be deep or shallow. A deep market means there are many buyers and sellers at different prices. It takes a big order to change the price much. In a shallow market, there aren't as many orders. Even a smaller trade can move the price noticeably.

Hidden Layers of Market Depth

However, it's not just about looking at the visible orders on the screen - there is much more happening behind the scenes. Traders usually track also hidden liquidity, (like iceberg orders, where only part of the order is visible) and dark pools, where trades occur off public exchanges. These elements make market depth much more nuanced than it first appears.

How Market Depth Works

Market depth is most commonly viewed through the order book. This list changes often as people place new orders or fill existing ones. When someone makes a big trade, it uses up orders in the book. If there aren't enough orders to match the trade, it starts taking orders at different price levels. This can make the stock price move.

In markets with less activity, big trades can cause larger price changes. Traders call this slippage. It happens because there aren't enough orders to keep the price steady.

Good markets have small gaps between buy and sell prices. This gap is called the bid-ask spread. Smaller spreads mean more trading activity. This usually leads to steadier prices.

Where Can You Find Market Depth Data?

Cryptocurrency exchanges (especially the larger centralized ones) often provide access to market-depth data through their order books. Level 2 data - offering a deeper view of multiple price levels.

More advanced traders often use specialized platforms and services such as CoinAPI that offer detailed market depth metrics, including data from across multiple exchanges.

Institutional traders and high-frequency traders often go to direct market access platforms to get even more granular data for better control over their trades.

Things to Remember

• Market depth is more than just a snapshot of buy and sell orders. It provides a deep insight into market liquidity and potential price impact, so by analyzing market depth, traders can understand potential price movements and manage risks during trades.