Deep Market: What it Means, How it Works

What Is Deep Market?

A stock or other security is said to have a deep market if it trades in a high volume with only a small spread, or difference, between the bid price and the ask price. By contrast, a security has a thin market if the trading volume for it is low and the spread is wide. This is sometimes described as a narrow market.

Understanding Deep Market

The terms deep market or thin market usually refer to an individual stock or other security but may also be used to describe an entire exchange, market, or industry, such as an emerging country market.

Many of the stocks listed on the New York Stock Exchange (NYSE) and the Nasdaq are deep market stocks. They are widely-held stocks and the volume of shares traded is consistently high, keeping the spread relatively narrow.

In contrast, stocks traded over-the-counter (OTC) tend to be more volatile in both price and volume. They are thinly traded.

The difference can be important to traders. Stocks that have a deep market, such as Apple (AAPL) and Microsoft (MSFT), virtually always show a strong trading volume. They are highly liquid, which means that there are a sufficient number of buy and sell orders at any given time to satisfy immediate demand. Therefore, large orders for the stocks can be executed without significantly affecting their market price.

The stock prices of smaller or more obscure companies can move significantly as a result of a single trader placing a large buy or sell order.

Data on the depth of the market for specific securities help traders determine where its price could be heading in the near future as orders are filled, updated, or canceled. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures.

Not every stock that trades in a high volume has good market depth. On any given day there may be an imbalance of orders large enough to create price volatility even for stocks with the highest daily volumes.

Having real-time market depth information can help a trader profit from short-term price volatility. For example, when a company launches an initial public offering (IPO), traders might stand by until they see strong buying demand, signaling that the price of the newly issued stock should continue its upward trajectory. In this case, a trader might buy shares and then wait only as long as it takes for the price to reach a particular level or selling pressure to mount before selling.