What depth of market shows

The window is a list of commitments 

The quote on an ordinary screen is one row of something taller. The earlier lessons in this module assembled that row: the highest bid and the lowest offer among the sources a firm can see, true for the size sitting behind it and no further. A depth of market window shows what sits underneath it. It is drawn as a ladder, with the sell side stacked above the buy side and the two nearest prices meeting in the middle, and beside every price there is an amount. The amount is what makes the window worth opening, because a price with no size attached is a price for an unknown quantity, which is an incomplete piece of information rather than a small one.

The rows are called levels. The first level on each side is the top of the book, and it is the pair any ordinary quote display already shows. The second level is the next best price still standing behind it, the third is the one behind that, and so on for as many rows as the platform is configured to draw. Every amount on the ladder is resting: it is there because a participant has posted a commitment to deal at that price and has not yet withdrawn it, and it leaves the ladder when it is dealt on, cancelled or allowed to lapse.

Two features of that shape are typical rather than accidental. Amounts tend to grow as the rows move away from the middle, because a participant posting close to the current price accepts both a higher chance of dealing immediately and a higher chance of dealing with somebody better informed, so the sizes committed nearest the middle tend to be the smallest on the board. And the two sides are rarely a mirror of each other. At any instant one side usually carries more resting size than the other, and that condition changes continuously with nothing having traded.

What the size at a level actually is 

The number beside a price is a sum, not an order. Aggregation, from the previous lesson, is what produced it: several sources can be quoting the same price at the same moment, and the platform adds their amounts together and prints one figure. Nothing in the display says whether that figure is one commitment or many small ones, and the two behave differently, because a single participant can withdraw the whole of an amount in one action while several independent ones rarely do so at the same instant.

Units differ, and reading a ladder starts with reading its heading rather than its rows. Some platforms print size in lots, some in units of the base currency, some in contracts, and some in the millions convention the interbank market uses. A ladder whose units have been assumed rather than checked reports a market a thousand times larger or a thousand times smaller than the one actually on the screen, and every conclusion drawn from it inherits the error.

What an order larger than the top does to it 

An order for an amount that exceeds the size resting at the top cannot be filled at the top. The part of it the first level covers deals at the first level, and the remainder goes on to the next price still standing, which is worse by construction, because a better price would have been the top. The order carries on down the ladder until the whole amount is covered. What comes back is therefore not one price but several, reported as their weighted average.

The average in each case sits away from the price the ladder showed at the top, and the distance is a property of two things only: the size of the order and the sizes resting at each level. Nothing in the calculation depends on which direction was taken, and the asymmetry between the two results here comes from the assumed ladder being thinner on one side, not from anything structural about buying or selling. This is the one question a depth window answers well, and it is why execution desks keep one open. It does not describe where a price is going. It describes how much of the current price actually exists.

Why the visible ladder is not the whole market 

A depth window is complete about exactly one thing: what one firm could see from its own sources at one instant. It is silent about several others, and each silence has a mechanical cause.

• Coverage. The ladder is built from the sources that firm subscribes to. A commitment posted by a participant it is not connected to is real, dealable and absent from the display.
• Concealment. Participants who do not want a large intention advertised can hold size back, or expose a slice at a time so a further slice appears only once the visible one has gone. What is shown at a level is a floor on what is there, never a ceiling.
• No centre. Spot currency has no single venue and no consolidated tape, so there is no one book for a window to show. Two firms drawing the same instrument draw different ladders, both accurate, exactly as the earlier lesson described for the top row alone.
• Truncation. A window draws as many levels as it is configured to draw, and a firm publishes as many as it chooses to publish. Size beyond the last visible row is not absent, it is unreported.
• Conditionality. A displayed commitment can still be declined when an order reaches it, under the last look convention described earlier in this module. Depth that cannot be dealt on is depth in appearance only.

One reading of the ladder is repeated widely enough to need stating plainly. Traditions that watch resting size treat a heavier side as evidence of pressure in one direction, and other traditions, watching the same observation, treat it as evidence of intent in the other. Both schools exist, they contradict each other on identical data, and neither has answered the objection that resting commitments can be posted precisely because they are visible and withdrawn before anything is ever dealt against them. A ladder records what is currently posted. It carries no information about what is not posted, and it is not a statement about a future price.

How the two platforms present it 

The platforms available at YAL are MetaTrader 5. Both of them draw depth, and they do not draw it the same way, so the same underlying data can look like two different markets to a reader who has not noticed which arrangement is on the screen.

The MetaTrader 5 depth of market window is opened per symbol, from that symbol's own context menu, and prints a vertical price ladder with the resting amount beside each level and the dealing controls attached to the rows, so an order can be written at a chosen price from the ladder itself rather than from a separate dialog. The span of prices the window covers can be widened or narrowed, and the display can be set to show only the rows nearest the middle or a longer stretch of them.

What it cannot do is display information its data feed does not carry. Depth is a property of the feed, not of the software drawing it, so an instrument whose sources publish only a top of book shows one row on any platform, and the fullness of a ladder differs by instrument, by session and by which sources happen to be standing at that moment. A shallow ladder is a report about the market at that time, not a defect in the window.

Where practitioners disagree 

The first argument is whether an aggregated ladder in an over the counter market is a book in the same sense as an exchange's central order book. One camp treats it as a workable approximation, on the reasoning that competing commitments are competing commitments however they are collected. The other holds that the two objects only resemble each other, because adding several sources' quotes together can count the same underlying capacity twice when those sources hedge with one another, so a total that appears deep can be shallower than it reads. Neither camp can settle it from the display, since the display is exactly what the disagreement is about.

The second argument is whether more visible levels are better. One view holds that every additional row is additional information, and that a truncated window hides the thing a reader most needs when sizing an order. Another holds that beyond the rows an order would actually reach, extra levels are noise, and that a long ladder mainly invites the imbalance reading above, which two schools of practitioners interpret in opposite directions. Both positions concede the same underlying point, which is that resting size is a description of the present and its usefulness falls away sharply the further it is read into the future.