The Order Book and Market Depth

The order book is the live list of all limit orders waiting to be filled for an asset, organised by price. Bids (orders to buy) sit on one side, asks (orders to sell) on the other. The best bid and best ask form the quote you normally see. Market depth refers to how much size is waiting at the prices beyond that, and the screen that shows it is often called Level 2 or depth of market (DOM).

Reading an order book#

• The best bid is $40.00 for 1,200 shares; the best ask is $40.02 for 800 shares.
• The spread is $0.02. See Bid-Ask Spread.
• Depth within five cents: 12,600 shares bid and 11,400 offered.

What depth tells you#

How much your order will move the price#

A market buy for 3,000 shares would take 800 at $40.02, 1,500 at $40.03 and 700 at $40.04, for an average of about $40.03. The deeper the book, the less your order moves the price. See Market Impact and Slippage.

Where liquidity is concentrated#

Large orders at a price, like the 6,000 shares offered at $40.05, can act as short term resistance, because buyers must absorb them before the price can rise further. Traders call these walls.

Imbalances#

If far more size is bid than offered near the market, some traders read it as buying pressure. Imbalances can be informative in the very short term, but they are easy to misread.

Hidden liquidity#

The visible book is not the whole market. Iceberg orders show only part of their size, hidden orders show none, and dark pools and other venues hold liquidity that does not appear on a single exchange's book. In US stocks, each exchange has its own book; consolidated Level 2 views combine them. See Hidden and Iceberg Orders and Dark Pools.

Order book in different markets#

• Stocks: depth per exchange, consolidated by many platforms.
• Futures: each contract trades on one exchange, so the DOM shows the whole visible market; futures traders often trade directly from a price ladder.
• Crypto: each exchange has its own book; depth varies hugely between exchanges and tokens.
• Prediction markets: each outcome has its own book of Yes and No orders priced in cents, and depth is often thin away from the best price.

Who uses order book data#

• Scalpers and day traders who time entries around short term supply and demand.
• Market makers who manage quotes. See Market Makers and Liquidity Providers.
• Execution traders who judge how much they can trade without moving the price.
• Swing traders rarely need it; for daily chart strategies it adds little.

See Market Data Levels: Level 1, 2 and 3 for the data feeds behind these views and their costs.

Frequently asked questions#

What is market depth?#

The amount of buy and sell orders waiting at prices beyond the best bid and ask, showing how much can trade before the price moves.

What is Level 2 data?#

A view of the order book showing multiple price levels and sizes, not just the best bid and ask.

Can the order book predict price direction?#

It can hint at very short term pressure, but orders change constantly and can be cancelled, so it is an unreliable predictor on its own.

Sources#

• Wikipedia, Order book