#Definition
Depth of market (DOM) refers to the quantity of buy and sell orders waiting at different price levels in an order book. In prediction markets, DOM shows how much liquidity exists at each price point, revealing how large a position you can take without significantly moving the price.
A market with deep DOM has substantial orders stacked at many price levels, allowing large trades with minimal slippage. Shallow DOM means even modest orders can cause significant price impact.
#Why It Matters in Prediction Markets
Depth of market directly determines trading costs and execution quality. Understanding DOM helps traders:
Size positions appropriately: DOM tells you the maximum position you can take at a given price. Trying to buy more than the available depth forces you into worse prices.
Estimate true trading costs: The displayed bid and ask only tell you the best available prices. DOM reveals what happens when you need to trade size—how much prices will move against you.
Identify liquid vs. illiquid markets: Two markets might show identical spreads, but vastly different DOM. The market with deeper liquidity offers better execution for meaningful positions.
Time entries and exits: DOM fluctuates throughout the day and around events. Trading when depth is greatest minimizes execution costs.
Detect informed trading activity: Sudden changes in DOM—large orders appearing or disappearing—can signal that informed traders are positioning.
#How It Works
#Reading the Order Book
The order book displays DOM as a stack of orders on both sides:
Example DOM for a binary market (Yes shares):
| Bid Price | Bid Size | Ask Price | Ask Size | |
|---|---|---|---|---|
| $0.48 | 2,000 | $0.52 | 1,500 | |
| $0.47 | 3,500 | $0.53 | 2,000 | |
| $0.46 | 1,800 | $0.54 | 4,000 | |
| $0.45 | 5,000 | $0.55 | 3,000 |
Reading this DOM:
- Best bid: $0.48 for 2,000 shares (what you'd receive selling immediately)
- Best ask: $0.52 for 1,500 shares (what you'd pay buying immediately)
- Total bid depth (top 4 levels): 12,300 shares
- Total ask depth (top 4 levels): 10,500 shares
#Calculating Price Impact
To buy 5,000 Yes shares using the DOM above:
- First 1,500 shares fill at 780
- Next 2,000 shares fill at 1,060
- Remaining 1,500 shares fill at 810
- Total cost: $2,650
- **Average price: 0.52 displayed ask)
The effective price is $0.01 (1.9%) worse than the best ask due to insufficient depth at the top level.
#DOM in AMM Markets
Automated Market Makers don't have traditional order books, but they have equivalent depth determined by pool liquidity:
Price Impact ≈ Trade Size / (2 × Pool Liquidity)
A pool with 10,000—the same trade size causes less price movement.
Example:
- Pool liquidity: $50,000
- Trade size: $1,000
- Approximate price impact: 50,000) = 1%
AMM Nuance (The 'b' Parameter): In LMSR markets (common in earlier prediction tech), depth is controlled by a liquidity parameter 'b'. A higher 'b' means the price curve is flatter—it takes more capital to move the probability by 1%. This functions identically to "thick" order books in traditional markets.
#Visualizing Depth Levels
#Python: Estimating Slippage
Simple tool to calculate weighted average price for a large order walking the book.
def calculate_slippage(order_book, size_needed):
"""
Simulates a market buy order walking up the order book.
order_book: List of (price, size) tuples, sorted by price.
"""
total_cost = 0
size_filled = 0
for price, depth in order_book:
if size_filled >= size_needed:
break
take_size = min(depth, size_needed - size_filled)
total_cost += take_size * price
size_filled += take_size
print(f"Filled {take_size} @ ${price}")
avg_price = total_cost / size_needed
best_ask = order_book[0][0]
slippage = ((avg_price - best_ask) / best_ask) * 100
return avg_price, slippage
# Market Asks: [(Price, Shares)]
asks = [(0.52, 1500), (0.53, 2000), (0.54, 4000)]
avg, slip = calculate_slippage(asks, 5000)
print(f"Avg Price: ${avg:.4f} (Slippage: {slip:.2f}%)")
#Visualizing Depth
Many platforms display DOM as a depth chart—a visualization showing cumulative order volume at each price level. The steeper the curve, the more depth; a flat or gradual curve indicates thin liquidity.
#Examples
High-liquidity election market: A major presidential election market shows 50,000+ shares available within 2 cents of the best bid and ask. A trader can take a $10,000 position with less than 0.5% slippage. DOM this deep indicates institutional participation and high market interest.
Thin specialty market: A market on an obscure regulatory decision shows only 500 shares at the best ask, with the next 1,000 shares 3 cents higher. A trader wanting $5,000 exposure would move the price significantly. The shallow DOM signals this market is unsuitable for large positions.
DOM asymmetry: A market shows 10,000 shares on the bid side but only 2,000 on the ask side. This asymmetry suggests more traders want to buy than sell—potentially signaling bullish sentiment. Alternatively, market makers may be reducing ask-side exposure due to information concerns.
Event-driven depth changes: Before a major announcement, DOM thins dramatically as market makers widen spreads and reduce size. After the event resolves, depth returns as uncertainty decreases. Traders who need to exit during thin DOM periods pay significant slippage.
#Risks and Common Mistakes
Ignoring depth beyond best price: Traders who only check the best bid/ask miss critical information. A 1-cent spread means nothing if only 100 shares are available at those prices.
Assuming stable depth: DOM changes constantly. The depth you see when planning a trade may not exist when you execute, especially in fast-moving markets.
Iceberg orders: Some traders hide their full order size, displaying only a fraction ("iceberg" or "hidden" orders). Visible DOM may understate true liquidity—or overstate it if hidden orders don't exist.
Spoofing concerns: Displayed orders can be placed and canceled to manipulate perception. Large orders that repeatedly disappear before execution ("spoofing") create false impressions of depth.
Over-reliance on historical depth: Just because a market had deep DOM yesterday doesn't mean it will today. Liquidity providers adjust based on risk, leaving markets unexpectedly thin during volatile periods.
Misreading AMM depth: In AMM markets, apparent liquidity can be misleading. Large trades consume liquidity and move prices non-linearly, making intuition from order-book markets unreliable.
#Practical Tips for Traders
-
Check DOM before every trade, not just the spread—know how much size is actually available at quoted prices
-
Size positions to available depth: If only 10,000
-
Use limit orders in thin markets to control execution price rather than accepting whatever depth exists
-
Monitor depth changes over time to understand when markets are most liquid (often during peak trading hours or around major events)
-
Calculate average execution price for your intended size before trading, not just the best available price
-
Be suspicious of sudden depth increases right before your order executes—this can indicate front-running or manipulation
-
For large positions, consider splitting orders across time to avoid exhausting available depth at once
-
Compare DOM across platforms for the same event—one platform may offer significantly better depth
#Related Terms
#FAQ
#What is depth of market in simple terms?
Depth of market shows how many shares or contracts are available to buy or sell at different prices. Think of it as inventory on shelves—the "depth" tells you how much you can purchase at the listed price before the shelf is empty and you need to pay more for the next shelf.
#How does DOM differ from the bid-ask spread?
The bid-ask spread tells you the difference between the best buy and sell prices. DOM tells you how much volume exists at those prices and at prices beyond. A tight spread with shallow depth is less useful than a slightly wider spread with deep liquidity. DOM provides the complete picture; spread is just the surface.
#Why does depth of market change so frequently?
DOM reflects the constantly updated orders of all market participants. Market makers adjust their quotes based on risk, inventory, and information. Other traders add and cancel orders as their views change. News events, time of day, and proximity to market resolution all affect how much liquidity providers are willing to offer.
#How do I use DOM to improve my trading?
Before trading, check not just the best price but the depth available. Calculate your expected average execution price based on your intended size. If the available depth at reasonable prices is less than your desired position, either reduce size or use limit orders to build position over time. Avoid trading during periods of thin DOM when execution costs spike.
#Is more depth always better?
Generally yes—deeper markets offer better execution and lower trading costs. However, extremely deep markets may indicate the opportunity is already well-known and any edge is priced in. In prediction markets, a balance of sufficient depth for your position size without perfect efficiency often presents the best opportunities.