Quick definition Depth-of-book (DOB) shows the quantity of buy and sell orders available at each price level in the order book, not just the top-of-book. It reveals how much liquidity is available if you need to move away from the best prices. What it is While top-of-book shows only the best bid and ask, depth-of-book extends several price levels deeper. If the best ask is 100.51 with 100,000 shares, the next ask might be 100.52 with 200,000 shares, and 100.53 with 150,000 shares. This additional information tells you how much volume exists below the surface. Depth-of-book is particularly important for large orders. If you need to buy 500,000 shares and only 100,000 are available at the best ask, you need to understand the depth to estimate your market impact. Why it matters Depth reveals market liquidity beyond the top-of-book. A wide spread combined with deep order books means traders have flexibility. A wide spread combined with shallow order books means liquidity is concentrated and large trades will be expensive. High-frequency traders use depth information to estimate market conditions and infer the intent of other traders. A sudden reduction in depth can signal that liquidity providers are withdrawing, often before a price move. Practical example You want to buy 1 million shares. The top-of-book shows: - Ask: 150.00 (500,000 shares) - Depth below: 150.01 (300,000), 150.02 (200,000) Only 500,000 shares are available at the best ask. To buy all 1 million shares, you will need to buy the remaining 500,000 at 150.01 or 150.02, incurring slippage of 0.01 to 0.02 dollars per share on half your order. If the depth had shown 2 million shares at 150.00, you could execute your full order at a single price. Market depth indicators Traders use metrics like cumulative volume at each price level to assess whether the market is deep or thin. A deeply bidded market (where there is a lot of volume on the bid side) suggests buyers are aggressive; a deeply offered market suggests sellers are aggressive. See also - Order Book - Top-of-Book - Liquidity - Order Book Imbalance
