Market depth

An order book is more than the single best buy and best sell price. Behind those two numbers sit further orders, waiting at prices a little worse for whoever placed them. How much quantity is sitting at each of those price levels is called market depth.

The workbook's own description: an order book "lists the number of shares/lots being bid on or offered at each price point, or market depth", and this is generally shown up to five price levels on each side.

The order book is built from two mirrored halves. The buy side shows prices in descending order — highest bid first — and the sell side shows prices in ascending order — lowest ask first. At each price level the book shows both the total quantity waiting and the number of separate orders that make it up, and the identities of the participants behind those orders stay anonymous.

The book is dynamic: it updates in real time through the day as orders arrive, are modified, cancelled, or matched into trades.

Market depth matters directly to a market order. A market order without protection fills at whatever the best available price is; if the depth at that best price is thin, a large order walks down the book, filling progressively worse prices until the full quantity is done. Deeper markets absorb large orders with less price movement; shallow ones move more for the same size.

The workbook's own order book for the 6.10% GOI Bond 2031 Futures contract, expiry 28 October 2021:

Total buy quantity is 3,525 lots, total sell quantity 4,250 lots — the market's full depth on each side, five price levels deep.

A trader wanting to buy 100 lots at market would sweep through the sell side: the first 10 lots at 98.5625, then 11 lots at 98.5700, then 38 lots at 98.5750, then 41 more lots at 98.5800 to complete the 100 — paying an average price well above the best offer, purely because the depth at the very best price (10 lots) was smaller than his order.

Chapter 6 (Trading Mechanism in Exchange Traded IRD), section 6.2.4 (Order Book), introduces market depth alongside the order book's structure, and section 6.3.2 uses it again when describing how a market order fills across the available depth. Expect a question using a sample order book table to compute an average fill price across several depth levels.

• Depth is quantity waiting at a price, not the price itself. A tight bid-ask spread with thin depth can still be a bad market to trade a large order in.
• The exchange shows depth up to five price levels a side — beyond that, the book is not displayed even though further orders may exist.
• Buy prices descend, sell prices ascend as you read down the book — mixing this up flips which side is "best".
• A large market order walks the book, so its average fill price is worse than the single best price once its size exceeds the depth sitting there.