Forum Archive Index - December 2001

["Ben Dutton" <bendutton@sharechat.co.nz>]

John,

 

Viewing depth can be pretty subjective, and sometimes just darn misleading.  I'll have a stab at helping you out though.

 

Lets take the Telecom depth snapshot that you provided:

 

	BIDS					OFFERS
	#	Volume		Price		Price		Volume	#
1	2	83,881		501		502		111,462	2	1
2	5	55,857		500		503		10,000	1	2
3	1	20,000		499		504		10,235	2	3
4	2	56,800		498		505		21,000	3	4
5	1	850		495		509		6,000	1	5

When you took this snapshot the "Buy" and "Sell" quotes would have been $5.01 and $5.02, respectively.

 

There were two orders wanting to buy a total of 83,881 shares at $5.01 and there were two orders wanting to sell a total of 111,462 shares at $5.02.

 

Thus, lets say that you wanted to buy a total of 150,000 shares at $5.02 (I'm assuming you're a high roller here ;).  You would put in a limit order but only 111,462 shares would be filled.  The buy and sell quotes would then change to 38,538 bid at $5.02 and 10,000 on offer at $5.03 - the 38,538 would be your shares, waiting to be filled.

 

Traders like to see market depth because it gives an indication of a level of interest in the stock.  For example, lets say you wanted to buy a large number of shares of an illiquid stock like ITC or SPE.  You'd look at the depth beforehand to see how many sellers there were in the market, and how many shares you could get hold of without moving the market up (or down, if you are selling shares).

 

However, depth has its pitfalls - traders and brokers will put in "fake" orders to give a sense that the stock has many buyers or sellers.  For example, in that Telecom example I might put buy orders of 500,000 at $4.99 to give an illusion that the stock is heavily supported by buyers waiting in the wings.  But, if the stock started moving down, I'd pull the order before it was filled.

 

Hopefully this makes sense to you John, perhaps others would like to help explain the pitfalls of viewing market depth as well.

 

Best Regards

 

Ben Dutton