Guide To Using Market Depth Data


Market Depth (MD), also known as Level 2 Market Data displays the number of Buy orders and Sell orders of each price level of a particular listed security (eg. stocks or ETFs), up to 20 levels of pending orders on each Buy and Sell side. In simple terms, it shows the different price levels which buyers are willing to buy and sellers willing to sell at any given time where buyers are represented on the left and sellers represented on the right in the order book. MD is in real time and the orders shown changes constantly during the pre-open session to the market close.

1) Checking Liquidity

MD provides investors with an in-depth view of the stock’s trading activity and whole liquidity picture of a stock. With MD, investors are able to avoid illiquid stocks which often create additional cost, as they may need to buy at a higher price to fulfil its entire buy order or sell at a lower price to fulfil its entire sell order. Such illiquid stocks are also exposed to high volatility when large orders are being traded.

2) Optimising Orders

With the help of MD information, either sellers or buyers who perceive current market price to be too low or high respectively can now place their orders away from the current market price and still get a reasonably good chance for the order to be filled. This is possible as market depth allows investors to see where the large orders are, and allows them to place their orders ahead of the large orders.

3) Establishing Demand and Supply (Support and Resistance)

MD allows Technical Analysis users to verify the support and resistance levels seen on their charts. 
For instance, as price trades towards the support level, by cross-referencing with the MD; multiple levels of large buy queue will provide confidence that it is a valid support level. Similarly, multiple levels of large sell queue provide confidence on the establishment of a valid resistance level.

//amazon