PowerZone Trading Blog

Trading with Market Depth

Jean Folger - Wednesday, April 30, 2014

This article appears in the May 2014 issue of Futures magazine.

Market depth is an electronic list of buy and sell orders, organized by price level and updated to reflect real-time market activity. Most of today’s trading platforms offer some type of market depth display that allows traders to see the buy and sell orders waiting to be executed—not just the best bid and ask prices, but the bids and asks on either side of the market—as well as the size of all the bids and offers.

All of this information can be useful to traders because it shows not only where price is now, but where it is likely to be in the near future. Here, we look at market depth, from the basics to how you can add market depth to your trading toolbox.

Inside prices

Market depth displays information about the prices at which traders are willing to buy and sell a particular trading symbol at a single point in time. Market depth data are also known as Level II, depth of market (DOM) and the order book since it shows pending orders for a trading instrument.

Because market depth is in real time, it changes constantly throughout the trading session. On an instrument such as the E-mini S&P 500 futures contract (ES), which trades under extremely high volume, the market depth updates many times each second. On thinly traded instruments, the bids and offers may update every few seconds, minutes or even hours.

Regardless of how frequently new bids and offers come to the market, market depth shows the different prices and the number of orders lined up at each price to buy or sell. Read more