What Is Depth of Market – DOM?

Depth of market – DOM is a window that shows 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 particular security or currency. The higher the number of buy and sell orders at each price, the higher the depth of the market. This data is available from most exchanges, often free of cost but sometimes for a fee.

Depth of market data is also known as the order book since it shows pending orders for a security or currency. The book records the list of buyers and sellers interested in a particular security. There is also a matching engine that uses the book to determine which trades can be made.

Depth of Market – DOM Explained

In addition to measuring supply and demand, market depth is also a reference 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 number of shares typically will not result in noticeable stock price movements. However, if the stock is not particularly liquid and doesn't trade as often, purchasing a block of shares will have a more noticeable impact on the stock price.

Depth of market is typically represented as an electronic list of all outstanding buy and sell orders; these orders are organized by price level and updated in real-time to reflect all current activity. A matching engine pairs up compatible trades.

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 involved in the transaction of a security to see a full list of buy and sell orders pending execution, along with the size of the trade – instead of simply just the best options.

Key Takeaways

  • Depth of market, or DOM, is a trading tool that shows the number of open buy and sell orders for a security or currency at different prices.
  • DOM, also known as the order book, is essentially a measure of the supply and demand for a particular security.
  • DOM also refers to the number of shares that can be bought of a particular stock without having an impact on the price.

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 the 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 the desired level and/or if the trader observes selling pressure mounting.

Real-World Example

For example, if a trader is tracking Stock A, they might look at the buy and sell offers for the company on a depth of the market screen. Stock A might currently be 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 might determine that the market is pricing in Stock A going a bit higher. Armed with this knowledge, the trader can decide whether or not this is the right time to jump in and buy, sell or take other action.