What Is Depth of Market (DOM)?
Depth of market (DOM) is a measure of the supply and demand for liquid, tradeable assets. It is based on the number of open buy and sell orders for a given asset such as a stock or futures contract. The greater the quantity of those orders, the deeper or more liquid, the market is considered to be.
Depth of market data is also known as the order book since it consists of a list of pending orders for a security or currency. The data in the book is used to determine which transactions can be processed. DOM data is available from most online brokers for free or for a small fee.
Understanding DOM
By measuring real-time supply and demand, market depth is used by traders to assess the likely direction of an asset's price. It is also used to gauge the number of shares of the asset that can be bought without causing its price to appreciate. If a stock is extremely liquid, it has a large number of both buyers and sellers. A buyer can purchase a large block of shares without causing a substantial stock price movement. However, if a stock is not particularly liquid, it doesn't trade as constantly. Purchasing a block of shares may have a noticeable impact on the stock's price. Depth of market is typically displayed as an electronic list of outstanding buy and sell orders, organized by price level and updated in real-time to reflect current activity. A matching engine pairs up compatible trades for completion. Most online brokers offer some form of DOM display. This allows users to see a full list of buy and sell orders pending execution, along with the size of the trade, rather than just the best options available.Key Takeaways
- Depth of market (DOM) is an indicator of the current interest in a stock or other asset.
- It can be read as a signal of the likely direction of a stock's price.
- It is used to judge the optimal time to buy or sell an asset.
How to Use DOM Data
Depth of market data helps traders see where the price of a security may be heading in the near future as orders are filled, updated, or canceled. A trader might use market depth data to understand the bid-ask spread for a stock, along with its current volume.
Stocks with a strong depth of market tend to be popular large-cap companies like Apple (AAPL). They usually have strong volumes and are quite liquid, allowing traders to place large orders without significantly affecting their market prices.
Securities with poor depth of market tend to be more obscure companies with smaller market capitalizations. The prices of their stocks are likely to move if a single trader places a large buy or sell order.