What is Depth of Market – DOM?
Market Depth – DOM is a window that shows the number of open buy and sell orders for a security or currency at different prices. Measuring market depth gives an indication of the liquidity and depth of that particular security or currency. The higher the number of buy and sell orders at each price, the greater the depth of the market. These data are available in most exchanges, often free of charge but sometimes for a fee.
The depth of market data is also known as an order book because it displays pending orders for a security or currency. The book records the list of buyers and sellers interested in a particular title. There is also a match engine that uses the ledger to determine which transactions can be made.
Market depth – DOM explained
In addition to measuring supply and demand, the depth of the market is also a reference to the number of shares that can be bought from a particular company without causing a price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, buying a large number of stocks will generally not cause notable share price movements. However, if the stock is not particularly liquid and does not trade as often, buying a block of shares will have a more noticeable impact on the share price.
The scope of the market is generally represented by an electronic list of all pending buy and sell orders; these orders are organized by price level and updated in real time to reflect all current activity. A corresponding engine combines compatible trades.
Although the data is sometimes chargeable, most trading platforms now offer a form of display of the depth of the market. This allows all parties involved in a security transaction to see a complete list of pending buy and sell orders, as well as the size of the transaction – instead of just the best options.
Key points to remember
- Depth of market, or DOM, is a trading tool that displays the number of open buy and sell orders for a security or currency at different prices.
- DOM, also known as an order book, is essentially a measure of supply and demand for a particular security.
- DOM also refers to the number of shares that can be purchased from a particular stock without impacting the price.
Use of market depth data
The depth of the market data helps traders to determine where the price of a particular security might head in the near future when orders are filled, updated or canceled. For example, a trader can use market depth data to understand the bid-ask spread for a security, as well as the volume accumulating above the two digits. Securities with a strong market depth (for example, a very popular large-cap company like Apple (AAPL) will generally have a high volume and will be fairly liquid, allowing traders to place large orders without significantly affecting the price of the obscure companies with smaller market capitalizations) could be moved if an operator places a large buy or sell order.
The ability to view the depth of market information in real time for a particular security allows traders to take advantage of short-term price volatility. For example, if a company goes public (begins trading for the first time), traders may wait for strong demand to purchase, signaling that the price of the new public enterprise may continue to rise. In this case, a trader may consider buying stocks and selling them once the appreciation has reached the desired level and / or if the trader sees an increase in selling pressure.
Example from the real world
For example, if a trader is following action A, he can look at the company’s buy and sell offers on a depth of the market screen. Stock A is currently trading at $ 1.00, but there are also 250 offers at $ 1.05, 250 at $ 1.08, 125 at $ 1.10 and 100 at $ 1.12. Meanwhile, there are also 50 offers at $ 0.98, 40 offers at $ 0.95 and 10 each at $ 0.93 and $ 0.92. Looking at this trend, the trader could determine that the market values the A share a little higher. Armed with this knowledge, the trader can decide if it is the right time to intervene and buy, sell or take other measures.