Measuring Market Depth Through Immediate Trading Costs
Summary
The document notes that market depth has no single official quantitative definition and proposes measuring it through the cost of immediately buying and selling a specified quantity, given the order book at a particular time. This cost varies with both the trade size and the time sampled, so any depth measure depends on how those inputs are selected or averaged.
For trade size, the discussion suggests using a size relevant to a trader’s execution chunks, a typical daily trade size, or a distribution of market-order volumes. For time, it suggests sampling across seconds or weighting observations by intraday volume patterns. These choices produce different expected-cost measures and should reflect the intended use. The method is a practical proxy rather than a universal standard; it does not prescribe one quantity, time window, or aggregation rule, and it emphasizes aggregating executions when market orders span multiple trades.
Key ideas
- Market depth has no single official formula in the document’s account.
- Immediate round-trip cost for a chosen quantity provides a practical depth proxy.
- The estimate depends on the selected trade size and observation times.
- Trade sizes can reflect execution needs, typical sizes, or a volume distribution.
- Time samples can be averaged uniformly or weighted by intraday volume patterns.
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Full text
# How to measure market depth?
# How to measure market depth?
Is there a consensus on a formula for measuring the market depth of a book at a given point in time? Or a possible proxy for this measurement?
I see so many articles / people discussing market depth but no description on how they calculate it or measure it.
## Answer by lehalle (score 4, accepted)
https://quant.stackexchange.com/a/34639
There is no official definition of market depth (this is only a qualitative concept), only the cost of a roundtrip for a given number of shares of contracts. Take $V$ shares, on average, knowing the shape of the book at time $t$, what is the cost of buying and selling them immediately? You obtain a cost $C(V,t)$. Then you need to average or to choose an adequate $V$ or an adequate $t$.
- for $t$ there is no reason to choose a specific time, but you can either average on seconds ${\cal T}=(t_1, \ldots, t_K)$ or according to the intraday volume seasonality ${\cal B}=(\tau_1, \ldots,\tau_N)$ (more volume the morning and at the end of the day)
- for $V$ you can take only a typical volume of interest for you (if you know you will always split your metaorder in chunks of a given size $V^*$)
- otherwise you can use the average trade size of a day $\bar V$,
- or you can reuse a typical distribution of trade volumes of the day ${\cal V}=(v_1,\ldots,v_L)$. Be careful when I speak about trades, I have in mind market orders you need to aggregate several trades.
You end up with different measures of market depth, like $$\mathbb{E}(C(V,t)|V\in {\cal V}, t\in {\cal T}),$$ or $$\mathbb{E}(C(V^*,t)|t\in {\cal B}).$$Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.