What Is ‘Order Book Depth’ and How Does It Measure Liquidity?
Order book depth refers to the volume of buy and sell orders at various price levels away from the current market price. A deep order book indicates high liquidity, meaning large trades can be executed without significantly impacting the price.
A shallow order book indicates low liquidity and high potential for slippage. Arbitrageurs use depth to gauge the capacity of the market to absorb their trade size.
Glossar
Price Levels
Framework ⎊ Price levels, within cryptocurrency derivatives and options trading, establish a foundational structure for assessing market valuation and potential trading opportunities.
Order Book Depth
Depth ⎊ The order book depth, within cryptocurrency derivatives and options trading, quantifies the liquidity available at various price levels.
Buy and Sell Orders
Execution ⎊ Buy and sell orders represent the foundational mechanisms for price discovery and trade realization within cryptocurrency, options, and derivative markets, functioning as explicit instructions to execute a transaction at a specified price or better.
Deep Order Book
Depth ⎊ A deep order book refers to the presence of substantial cumulative volume of limit orders across a wide range of prices away from the current best bid and offer.
Shallow Order Book
Condition ⎊ A Shallow Order Book describes a market state where the volume of outstanding buy and sell orders immediately surrounding the current price is minimal relative to the typical trade size or expected market volatility.