Market depth provides a snapshot of the demand and supply or the liquidity of a particular stock. It lists buy and sell orders in the market at any given time and allows you to gauge whether or not you are able to transact at a particular price. Using a market depth screen you can quickly assess how many orders may exist and their respective prices.
Market depth can be helpful in determining where a stock will trade, although in many circumstances special calculations are required to determine the opening price. An example is a simple case where there is one buyer who wants to pay $26.05 for a volume of 8682 shares, whilst there is one seller who is prepared to sell 205 shares $26.07. The next price will be somewhere between $26.05 and $26.07.
The example below shows how the market depth function looks using the CommSec site during normal market hours.
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Before the opening of the market there is a short period called Pre-open. During this time, new orders can be entered, but no trades take place. Often during the Pre-Opening phase, the market overlaps and buy prices will be higher than sell prices. This is where some confusion arises and market depth is less helpful with algorithms, stgised by the ASX, in establishing opening prices.
These calculations use several steps where particular rules or conditions are applied to determine the price. In each case, if a clear result can’t be determined the next rule is applied. The rules are always applied in the same order. Most trading platforms continually calculate the matching price, or indicative opening price as the market opens.
By Matt Comyn, General Manager, CommSec
Disclaimers: The views expressed in this article are those of Matt Comyn, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814 and is not intended as general advice.