Depth of Market

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Under market depth is the ability of a market without significant changes in the market price and large market size to implement.

General

Market depth, market breadth and market tightness are mainly used in stock exchanges to assess the absorption capacity and market efficiency of financial markets ( money , foreign exchange and capital markets , especially stock exchanges) for trading objects . The connotations but can also access all product markets are transferred accordingly. All terms can be distinguished from one another in terms of their content, but they have an internal economic relationship to market liquidity .

Namely, market liquidity requires

Market liquidity only exists if all three criteria are met. A liquid market is characterized by a high market depth, market breadth and the ability to recover. One can speak of a market disruption if at least one of the criteria for market liquidity is not met.

Depth of Market

“A market is said to be low when there are both limited buy and sell orders in the market that can be executed at a price close to the existing market price. If trading takes place in a deep market, an imbalance that occurs between buy and sell orders can be balanced out with the help of the orders available in the market without causing significant price jumps. ”Depth of market therefore primarily relates to price continuity.

Order book

The market depth can be clearly explained in the order book using the tick size . 

 Anzahl               Kurslimit
 10.000 Stück         40,10 Euro
              ...  („Loch“ im Orderbuch)
  5.000 Stück         40,01 Euro
  5.000 Stück         40,00 Euro

There is a “hole” in the order book for “ticks” between 40.01 and 40.10 euros because there are no limited securities orders for these prices. These “holes” indicate shallow market depth. If the bid side now buys ( ceteris paribus ) an unlimited amount of up to 10,000 shares, the price increases “quasi-steadily” (discreetly with the tick size) to 40.01 euros for the last shares. From 10,001 shares, however, the price for the last share now rises sharply to 40.10 euros. The market now shows a limited depth on the letter side.

In the form of an index, the depth of market can be calculated, for example, as the slope of the order book (between two adjacent price limits); The bid and ask sides are considered separately.

Market breadth

The market breadth refers to the trading volume of the orders. Around the equilibrium price , large limit orders can have high volumes, which ensures that there are no major price changes in the case of unlimited orders. However, the terminology is not uniform in the specialist literature. Sometimes the breadth of the market is also interpreted as the diversity of the market. The author Kyle understands the market depth of the author Kenneth D. Garbade by market tightness and the market breadth of Garbade by market depth. For Garbade, a market is low when there is buying and selling interest above and below the current equilibrium price.

Narrow market

Narrow market ( english market tightness ) occurs when only 5% of the shares in free float are and took place over a considerable period no trading in shares of the company concerned. This is not yet the case if trading in the relevant shares took place on 15 days in one month and on 8 days in the other two months within a period of three months. Apart from this legal valuation, one speaks of market tightness when there is regularly low stock exchange turnover for certain trading objects. Reasons could be a relatively low market capitalization , low free float, or a combination of both. The volatility is very high, the bid-offer spread very wide, and courses do not represent the fundamental value . Market tightness is an indication of low liquidity and thus a market liquidity risk because market liquidity is low or nonexistent.

economic aspects

A high market depth stabilizes stock exchange prices because buying or selling decisions only result in marginal price fluctuations. This lower volatility in turn improves the security of the market participants , so that the depth of the market is increased through further transactions and a positive network effect arises as a result. Market depth and market breadth are also indicators of the degree of information asymmetry prevailing in a market . With increasing market liquidity, the degree of diffusion of private information increases, and as a result, market prices approach the intrinsic value of the objects of sale. As the market volume of the noise traders increases, so does the depth of the market, because the market attributes every change in supply to changes in behavior caused by noise . In the goods markets, tight markets always lead to delivery bottlenecks and gaps in shelves .

Individual evidence

  1. ^ Albert S. Kyle, Continuous Auctions and Insider Trading , in: Econometrica vol. 53 (6), 1985, p. 1317
  2. ↑ Alexander Kempf, Wertpapierliquidität und Wertpapierpreise , 1999, p. 18 f.
  3. ↑ Olaf Oesterhelweg / Dirk Schiereck, Measurement Concepts for the Liquidity of Financial Markets , 1993, p. 391
  4. ↑ Christian Gärtner, Liquidity on the German Capital Market , 2007, p. 8
  5. ↑ Lawrence R. Glosten: Is the Electronic Open Limit Order Book Inevitable? In: The Journal of Finance , Vol. 49, No. 4 (September 1994), pp. 1127-1161.
  6. ↑ Kenneth D. Garbade, Securities markets , 1982, pp. 420 f.
  7. ↑ Dirk Schilling, The Exclusion of Minority Shareholders , 2006, p. 130 f .
  8. ↑ Kenneth D. Garbade, Securities markets , 1982, pp. 420 f.
  9. ↑ BVerfG, judgment of April 27, 1999, Az .: 1 BvR 1613/94 = BVerfGE 100, 289 , 309
  10. ↑ BGH, judgment of March 12, 2001, Az .: II ZR 15/00 = BGHZ 147, 108 , 122
  11. ↑ Dirk Glebe, Understanding Stock Exchange , 2008, p. 88
  12. ↑ Dirk Schilling, The Exclusion of Minority Shareholders , 2006, p. 131
  13. ↑ Dirk Schilling, The Exclusion of Minority Shareholders , 2006, p. 196 f.