how traders use market depth data
market depth data helps traders determine where the price of a particular security could be heading for example a trader may use market depth data to understand the bid ask spread for a security along with the volume accumulating above both figures securities with strong market depth will usually have strong volume and be quite liquid allowing traders to place large orders without significantly affecting the market price meanwhile securities with poor depth could be moved if a buy or sell order is large enough market depth data usually exists in the form of an electronic list of buy and sell orders known as the order book these are organized by price level and updated in real time to reflect current activity 1 in the past this data used to be available for a fee but nowadays most trading platforms offer some form of market depth display for free this allows all parties trading in a security to see a full list of buy and sell orders pending execution along with their sizes instead of simply the best ones real time market depth data allows traders to profit from short term price volatility for example if a company goes public and begins trading for the first time traders can stand by for strong buying demand signaling the price of the newly public firm could continue an upward trajectory example of market depthconsider the order book information in the image below which displays the current bid ask spread on the left along with the market depth on the right this type of quote is also known as level 2 market data the current quote in the security meow shares is 13 62 13 68 with 3 000 shares on the bid and 500 shares on the offer the right panel indicates the depth of bids on the left if all 3 000 shares were sold at 13 62 the next best bid would be 13 45 but only for 16 shares 