What Is ‘Market Depth’ and Why Is It Important for Stability?
Market depth is the measure of a market's ability to sustain relatively large buy or sell orders without significantly impacting the price. It is visualized by the size and density of limit orders on the order book away from the best bid and ask.
High market depth indicates many willing buyers and sellers at various price points. This is crucial for stability because it absorbs large trades, preventing excessive price volatility and flash crashes.
Low depth can lead to high slippage and market manipulation.
Glossar
Liquidity
Depth ⎊ Liquidity, in the context of financial markets, is the degree to which an asset or derivative contract can be bought or sold quickly without significantly impacting its price, primarily measured by the depth of the order book.
Market Depth
Capacity ⎊ This refers to the aggregate size of limit orders resting on the bid and ask sides of the order book at various price increments away from the mid-price.
Effective Market Depth
Measurement ⎊ Effective market depth quantifies the actual tradable volume available before a market order causes the price to move beyond a predetermined threshold.
Order Book
Depth ⎊ An order book represents a listing of buy and sell orders for a specific cryptocurrency, option contract, or derivative, displaying price and quantity at various levels.