What is Market Depth – Understanding Buy and Sell Orders

Key Highlights
 

1. Market depth is the list of buy and sell orders at different prices. This streamlines the trade.
    
2. Level 1 shows only the best buy and best sell prices. If you want more detailed view of the market, go with Level 2. It shows 5 price levels.
    
3. NSE and BSE are responsible for keeping trading fair and transparent. They collect orders, share depth data, and set rules. 

Market depth is the ability of a market to handle large buy or sell orders without affecting the asset’s price. It shows available bids and offers at different price levels.

For example, Priya wants to sell 1,000 shares of ABC Ltd. Instead of seeing only the current best bid/ask, she looks at the market depth. It is an order book which is built from pending buy and sell orders placed by different traders.

This is how a typical market depth page would look.
 

By checking market depth, Priya sees that her 1,000 shares can be sold at ₹99 and ₹98. This gives her confidence to plan the trade.

Confidence. This is the most in-demand thing in today’s market. Market depth is one such way to build confidence and faith in your own trade plan. Let’s understand more about it in this blog. 

How Market Depth is Built?

To understand market depth, let’s take an example of Stock XYZ. The traders place buy and sell orders for this stock at different prices and these orders get recorded in what we call the order book. Let’s see the structure of the order book.

1. Order Book Structure

The order book sorts all buy and sell limit orders by their price. For instance, three traders might place buy orders for XYZ:

• Trader A wants 100 shares at ₹100
   
• Trader B wants 50 shares at ₹99
   
• Trader C wants 20 shares at ₹98

On the sell side, others might place orders like:

• Trader D wants to sell 80 shares at ₹101
   
• Trader E wants to sell 40 shares at ₹102
   
• Trader F wants to sell 30 shares at ₹103

So, initially, the order book looks like this:
 

The structure of an order book is the basis of market depth. With different trades, changes occur, and they are recorded in the order book.

2. Updates Based on Different Trades

Now, let’s say Trader A cancels half of their order, then there will be reduction of 100 shares at ₹100 to 50 shares. At the same time, a new trader enters and places a sell order of 20 shares at ₹101. Now, these updates are recorded in an order book. 
 

Now, as the order book changes, the market depth changes too. On every addition, cancellation, or order, the order book and market depth keep updating.

3. Aggregation at Each Price

Earlier, there was a buy order of 50 shares at ₹99. Now we have two more traders who placed buy orders at the same price:

• Trader 1: 30 shares at ₹99
   
• Trader 2: 20 shares at ₹99

In this case, instead of listing them separately, the order book combines them into one line:
50 + 30 + 20 = 100 shares (buy) at ₹99

This update is shown in bold letters in the table below for easy understanding. 
 

This aggregation makes it easy for traders to see where large orders are. This helps them understand how strong demand or supply is at each price level.

By combining all buy and sell orders at every price level, the exchange gives us the market depth as shown in the above table. For Stock XYZ, we can now clearly see:

• Demand on the buy side (bids) 
   
• Supply on the sell side (asks) 
   
• Liquidity: How easy it is to buy/sell without big price changes.
   
• Support:  Strong buy demand levels (like 100 shares at ₹99).
   
• Resistance:  Strong sell supply levels (like 50 shares at ₹100).

What are Level 1 and Level 2 Market Data?

Market data is categorised into 2 levels: Level 1 and Level 2. It is essential for traders to understand the market data because it reveals how orders are placed and executed. Let’s learn about Level 1 and Level 2 market data.

1. Level 1 Market Data

The data that shows only the top of the order book is the Level 1 market data. It shows the best bid the highest price buyers are willing to pay) and the best ask (the lowest price sellers are offering).

It includes current market price, bid-ask spread, and volumes at those top prices. For traders or investors who only need the latest quotes and spreads, reviewing Lebve 1 market data is enough.

For example, a trader wants to see the best buy and best ask data for Infosys stock while trading at NSE. The Level 1 market data will appear as:
 

This means that if you sell now, you will get ₹1,500. If you buy now, you’ll pay ₹1,502. That’s it, no extra detail.

2. Level 2 Market Data

It provides a deeper view of the order book as it usually gives up to 5–20 levels. It shows multiple price levels with their respective volumes on both buy and sell sides. It is useful for active traders, scalpers, and institutions who want to analyse market depth, liquidity, and supply-demand imbalances.

For example, if we take the same example of Infosys, then Level 2 market data will appear as:
 

This means that the trader sees market depth. For example, if you want to buy 6,500 shares, you’ll have to purchase at multiple price levels (1,502 then 1,503 then 1,504, etc.) and not just at the top.

Do you know NSE’s Level 1, 2, and 3 data is delivered via low-latency feeds (≤1 second)? This helps you make a decision instantly and gives you fixed prices. Also, if you view up to 50 levels of market depth, you can spot support/resistance, manage risk, target precision scaling for scalping, and detect possible spoofing.

Role of Exchanges (NSE/BSE) in Market Depth

Market depth is only possible because exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) control everything. They look after where all buy and sell orders are collected, organised, and matched. The table below highlights the different roles NSE/BSE play in maintaining and distributing market depth:
 

Without NSE/BSE, the data would not be distributed properly. The traders would not be able to see how much demand (bids) or supply (asks) exists at different price levels. 

Also, the transparency of the market, its regulation and accessibility to all traders are looked after by these exchanges. 

Conclusion 

Trading can be a little complex with such a vast range of data present all over. Market depth distributes this data in such a way that traders or investors can have an idea of the best ask and best sell price. 

It also gives traders transparency by showing buy/sell orders. It helps in identifying liquidity and understanding demand-supply. With this information, anyone can make a good decision with fewer risks.

Frequently Asked Questions

How do dark pools affect displayed market depth?
Dark pools hide large orders, so public depth underestimates true liquidity and can cause surprise price moves on execution.

Can high-frequency trading (HFT) distort market depth?
Yes, HFT firms post and cancel orders quickly, creating fleeting depth and enabling latency-based advantages.

Do advanced order types (IOC, FOK, MOC) change visible depth?
Yes, IOC/FOK remove liquidity immediately, and MOC clusters orders at close, producing temporary depth spikes.

How do derivatives (futures/options) influence cash-market depth?
Derivatives add synthetic liquidity and hedging flows that often lead or amplify depth changes in the underlying stock.

Can brokers’ order routing or internalisation hide real depth?
Some brokers internalise or route to off-exchange venues, so exchange-displayed depth may not reflect where trades actually execute.

What surveillance exists to prevent spoofing and fake orders?
Exchanges and regulators use pattern-detection systems, cancellation-rate limits, and penalties to deter spoofing and manipulative orders.

Who pays for Level-2/advanced depth feeds and how costly are they?
Institutions and active traders subscribe to paid depth feeds; costs vary by exchange and depth level, while retail users rely on broker feeds.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?