Definition, Uses, and Real-World Examples
What Is Market Depth?
Market depth refers to a market’s ability to absorb relatively large market orders without significantly impacting the price of the security. Market depth considers the overall number of open bids and offers in an order book, and is a crucial measure of liquidity.
Generally, more buy and sell orders mean greater market depth, assuming these orders are spread evenly around the current price. Institutional traders need to consider market depth when making large trades, because a large buy or sell order could cause the price to shift. However, market depth does not always correlate with high trading volumes.
Key Takeaways
- Market depth reflects a market’s ability to absorb large orders without significantly…
