What is market depth?

The quantity of buy and sell orders resting near the current price, which decides how far a large order moves the market.

Depth is what the order book looks like sideways. The best bid and best offer tell you the current price, but the sizes stacked behind them tell you what happens when someone arrives with real money. Exchange depth charts draw it as two curves rising away from the mid price, and depth is what RampAtlas measures when it reports how much a $500, $5,000, or $50,000 order would pay in slippage.

The frequent error is reading 24-hour volume as depth. A pair can turn over millions of dollars a day in small trades and still have almost nothing resting on the book at any one moment, so a modest order fills badly. Volume is a history, depth is a present-tense inventory.

How it works

Every limit order sits at a price level with a size. Summing the sizes from the mid price outward gives cumulative depth: the notional you could buy before the price rises past a given point.

A market order eats through those levels in order. It fills at the best offer until that level is exhausted, then the next, and so on. The average price you pay is therefore worse than the quoted best offer whenever your order is larger than the first level, and the difference is slippage.

Depth is measured within a band, because the total book down to zero is meaningless. The convention RampAtlas uses is the notional resting within 1% of the mid price on each side, which is comparable across assets in a way a raw order count is not.

Two properties make depth harder to trust than it looks. It is not a commitment: resting orders can be cancelled in the same millisecond you try to hit them, so displayed depth and tradeable depth differ. And it is not symmetric, so a book can be thick on the bid and thin on the offer at the same moment.

Example

Illustrative levels on the sell side of a thin pair.

A $9,000 market buy takes all of the first two levels and part of the third. The average fill is about $100.55 against a quoted $100.00 best offer, so the order paid roughly 0.55% in slippage on top of any trading fee. The same order on a book with 4,000 units at the first level would have filled at $100.00.

Why it matters when you buy

Depth decides the true cost of a market order, and for anything above a few hundred dollars it can exceed the trading fee. Before a large buy, check the measured depth and modeled slippage for that asset on the liquidity pages, then compare it against the fee columns on the fee comparison. A venue with a slightly higher fee and a much deeper book is often the cheaper route.

Related terms

• order book — where depth is displayed
• slippage — the cost of eating through levels
• liquidity — the broader property depth measures
• order book imbalance — depth uneven between the sides
• price impact — how far your own order moves price
• market order — the order type depth prices

Questions

How much depth is enough?

It depends entirely on your order size. A useful test is whether the modeled slippage on your intended notional is small next to the trading fee. If it is larger, the order is big for that book.

Why does depth vanish during volatility?

Market makers widen or withdraw quotes when they cannot price risk. Depth is thinnest exactly when volatility is highest, which is when a market order is most expensive.

Can I avoid paying for thin depth?

Use a limit order and let the market come to you, or split a large order into smaller pieces over time. Both trade certainty of execution for a better average price.