Truth about Market depth

Truth about Market depth

Some time ago we updated our EXANTE platform and enabled trading from the Market depth module. This new feature has recently been tested by our partner, Sergey Golubitsky, and he has shared his experience with us. This overview may be useful for those who have never used Market depth for trading, or for those who are searching for additional analytical data sources.


What is Market depth?

Most people who are acquainted with stock exchanges are aware of an asset market price, and also of its instability. It is also common knowledge that purchase and sale prices of one asset may differ from each other. This difference can be found in the market, in banks when it comes to currency exchange, and in some other situations. Few people ever thought, however, that these two prices are only the top of the iceberg.

When a trader submits an order to buy or sell an asset, he has two main alternatives:

  • To submit a Market order, which means to buy or sell an asset at the current market price. Such orders are usually executed quite quickly: the broker finds a counter-offer rather easily because they all spin around similar prices.
  • To submit a Limit order, which is to buy an asset at a price lower, or to sell an asset at a price higher than specified. Such an order will be executed only if the market price of the asset meets the stated requirements, which may happen only far in the future - or sometimes even never.

Besider that, there are insuring orders of the Stop type. With such orders traders buy assets if their price increases to some level, or buy if it falls.

Market orders are usually executed once they are placed. Stop orders are stored at the broker and sent to the exchange only when they should be executed. As for the Limit order, they are always stored on exchanges in their so-called order books, and these orders make up a valuable source of information for investors.

Let's introduce some basic notions:

  • Market depth is the whole selection of the orders stored at each moment in the exchange's order book.
  • Bid price is the highest price stated in the purchase limit order. Ask price is the lowest sale price available currently in the market.
  • Spread is the difference between bid and ask prices.

Take the following example: there are three purchase limit orders and three sale limit orders for IBM stocks. One of the sellers wants to sell his stock not cheaper than $100, the second wants to get $101, and the third is aimed at $102. One the other side, one of the buyers wants to spend $100, another has only $99, and the third can only come down with $98. Obviously, in such conditions only one deal can be executed, at the price of $100. The others will have to either change their expectations or wait for the situation to change.

Which prices will be used as quotes after the first deal is executed? In our case, bid price will be $101, while ask price will be $99, the rest will be left aside - invisible for most market players. However the $102 and $98 bids still exist, and they take the most active part in market dynamics definition.

Using the Market depth tools gives the trader additional information about the market, and nowadays brokers provide such an opportunity. Let's take a look at the market depth of the Russian Sberbank stock futures as it is shown by EXANTE:

The upper part of the table represents Sell orders. In the third column, the table shows the overall number of instruments that traders want to sell at each price. The lowest price, 10,456 is Ask price (the current quote). The lower part of the table shows Buy orders, and the highest price, 10,454, is the current quote. The smaller is the spread, the more effective is the market of the asset. In our case, the spread is only 2 rubles, which means the market is very active.

EXANTE allows trading right from the Market depth module by clicking the row with the price you want to make an order at. By doing so, you will manually list your order in the exchange order book:

This video shows the market depth and the chart of gol. In the beginning the trader makes six limit orders: three Sell orders and three Buy orders. Soon after the order placement the price of the gold goes down a bit, and all the Buy orders are executed. After five more minutes the prices go up again, and the assets are successfully sold.


Advantages of analyzing the market depth

The most obvious advantage is the increased awareness of the market state. The market depth obliquely shows how stable the current prices are, and it can prevent you from making ineffective Market orders.

If we take a look at the first picture again, we'll see that the current Bid price is 10,454. However, only one futures can be bought at that price. This means, if you want to sell two futures, only one of them will be sold at the current market price, and you will get 10,453 for the second one. What happens if you try to sell several dozens of futures? Well, your total order will be executed at a much lower price than you have expected. Do you now get why you should pay more attention to the market depth?

The idea is quite simple: find a price range that covers a big number of orders and join the majority. Let's get back to the example of Sberbank futures. Judging by the previous picture, the horizontal channel can be found between 10,445 and 10,466: this range covers the biggest number of orders. The following picture was made a little later, and it shows the Market depth module together with the Chart. 

Three minutes ago the price really jumped off the 10,445 level and started growing! Most orders were thus executed.


In this part we have indicated positive moments of using the Market depth data in the day-to-day trading. One of the articles will be devoted to the projected threats and problems connected with it. Stay tuned!

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