uTrade AlgosMarket depth refers to the level of detail available about buy and sell orders for a particular security. It provides traders with insights into potential price movements and liquidity. There are two primary levels of market depth: Level 1 and Level 2.
Level 1 Market Depth
Level 1 market data is the most basic and widely available form of market depth. It displays the following information:
- Best Bid Price: The highest price a buyer is willing to pay for a security.
- Best Ask Price: The lowest price a seller is willing to accept for a security.
- Bid Size: The total number of shares that buyers are currently willing to purchase at the best bid price.
- Ask Size: The total number of shares that sellers are currently willing to sell at the best ask price.
Level 1 market depth provides a snapshot of current supply and demand for a security. A large bid size relative to the ask size suggests that there is more buying interest than selling interest, which could put upward pressure on the price. Conversely, a large ask size relative to the bid size suggests that there is more selling interest than buying interest, which could put downward pressure on the price.
Level 2 Market Depth
Level 2 market depth provides a more comprehensive view of market depth by including all the information in Level 1 data, plus additional details about outstanding limit orders. Limit orders are orders to buy or sell a security at a specific price or better. Level 2 market depth typically shows the following information:
- Order Book: A list of buy and sell orders ranked by price, starting with the best bid and ask.
- Depth: The total number of shares available to be bought or sold at each price level.
Level 2 market depth allows traders to see not only the best bid and ask prices but also the concentration of interest at different price levels. This can be helpful for gauging the potential support and resistance levels for a security’s price. For example, a large number of buy orders clustered just below the current ask price could indicate support for the price, while a large number of sell orders clustered just above the current bid price could indicate resistance.
Conclusion
In summary, Level 1 market depth provides a basic view of current supply and demand for a security, while Level 2 market depth offers a more detailed picture by including information about outstanding limit orders. Level 2 market depth can be a valuable tool for traders who want to gain a deeper understanding of market sentiment and potential price movements.
Please note: Level 2 market data may be subscription-based and may not be available for all securities.