Market depth
Investopedia Financial Dictionary:
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Market Depth
The market's ability to sustain relatively large market orders without impacting the price of the security. This considers the overall level and breadth of open orders and usually refers to trading within an individual security.
Investopedia Says:
For example, if the market for a stock is "deep", there will be a sufficient volume of pending orders on both the bid and ask side, preventing a large order from significantly moving the price.
Market depth is closely related to liquidity and volume within a security, but does not mean that every stock showing a high volume of trades has good market depth. On any given day there may be an imbalance of orders large enough to create high volatility, even for stocks with the highest daily volumes. The decimalization of ticks on the major U.S. exchanges has been said to increase overall market depth, as evidenced by the decreased importance of market makers, a position needed in the past to prevent order imbalances.
Related Links:
Understanding the real forces that move stock prices is part of being a good trader. The Basics Of The Bid-Ask Spread
Find out the various ways in which a broker can fill an order, which can affect costs. Understanding Order Execution
Wikipedia on Answers.com:
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Market depth
In finance, market depth is the size of an order needed to move the market a given amount. If the market is deep, a large order is needed to change the price. Market depth closely relates to the notion of liquidity, the ease to find a trading partner for a given order: a deep market is also a liquid market.
Factors influencing market depth include:
- Tick size. This refers to the minimum price increment at which trades may be made on the market. The major stock markets in the United States went through a process of decimalisation in April 2001. This switched the minimum increment from a sixteenth to a one hundredth of a dollar. This decision improved market depth.[1]
- Price movement restrictions. Most major financial markets do not allow completely free exchange of the products they trade, but instead restrict price movement in well-intentioned ways. These include session price change limits on major commodity markets and program trading curbs on the NYSE, which disallow certain large basket trades after the Dow Jones Industrial Average has moved up or down 200 points in a session.
- Trading restrictions. These include futures contract and options position limits as well as the widely used uptick rule for US stocks. These prevent market participants from adding to depth when they might otherwise choose to do so.
- Allowable leverage. Major markets and governing bodies typically set minimum margin requirements for trading various products. While this may act to stabilize the marketplace, it decreases the market depth simply because participants otherwise willing to take on very high leverage cannot do so without providing more capital.
- Market transparency. While the latest bid or ask price is usually available for most participants, additional information about the size of these offers and pending bids or offers that are not the best are sometimes hidden for reasons of technical complexity or simplicity. This decrease in available information can affect the willingness of participants to add to market depth.
In some cases, the term refers to financial data feeds available from exchanges or brokers. An example would be NASDAQ Level II quote data.
References
- ^ Market Depth, Investopedia
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Transparency
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Depth of the Market
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market penetration
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Breadth of the Market
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