What does 'Depth of Market (DOM)' mean

Depth of market (DOM) is a measure of the number of open buy and sell orders for a security or currency at different prices. The depth of market measure provides an indication of the liquidity and depth for that security or currency. The higher the number of buy and sell orders at each price, the higher the depth of the market. Depth of market data is also known as the order book, since it shows pending orders for a security or currency. This data is available from most exchanges for a fee.

BREAKING DOWN 'Depth of Market (DOM)'

Depth of market also refers to the number of shares, which can be bought of a particular corporation, without causing price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk of shares typically will not result in noticeable stock price movements.

Depth of market usually exists in the form of an electronic list of buy and sell orders; these are organized by price level and updated in real time to reflect current activity. While at times the data is available for a fee, now most trading platforms offer some form of market depth display. 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.

Using Depth of Market Data

Depth of market data helps traders determine where the price of a particular security could be heading in the near future as orders are filled, updated, or canceled. 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 depth of market (e.g. a highly popular large cap company like Apple [AAPL]) will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting market price. Yet those securities with poor depth (more obscure companies with smaller market capitalizations) could be moved if a trader places a large buy or sell order.

Being able to view depth of market information for a particular security in real-time allows traders to profit from short-term price volatility. For example, if a company goes public (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. In this case, a trader might consider buying shares and selling them once appreciation has reached a desired level and/or if the trader observes selling pressure mounting.

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