Market depth

Jana opens BTC/USD, the pair for trading bitcoin against dollars. The Coinbase book describes a particular product, not every exchange. A depth figure therefore needs a venue, pair and snapshot time. One view may show only the best quote, another further levels. Without knowing the data coverage, Jana could mistake a partial view for the whole market. [1]

Two markets can have identical best buying and selling prices but very different quantities behind them. The difference between the best selling and buying prices is the Bid–ask spread. A small spread may suit a small trade, but says nothing by itself about buying a larger quantity just as cheaply. BIS therefore distinguishes costs represented by spreads from a market’s capacity to absorb large trades without a substantial price move. [2]

For a purchase, she counts asks, the selling offers, from the cheapest through her price ceiling, including that boundary. For a sale, she would count bids, buying offers, down to the lowest acceptable price. A percentage band also needs a reference price: a band measured from the midpoint of the best quotes differs from one starting at the best ask. Counting displayed rows cannot replace that price boundary. [3]

Adding quantities tells Jana how much BTC is offered in the band. Monetary value in dollars (USD) answers a different question: what would those offers cost? Multiply each level’s price by its quantity, then add the results. The number of orders is neither of these figures. Coinbase also explicitly warns against multiplying an aggregated size, already a sum, by the order count again. [1]

Some displays show a running total, called cumulative quantity. At a further price, it already includes earlier, better-priced offers. Adding these rows again would count the same bitcoin repeatedly. Jana therefore needs to know whether a value belongs to that level alone or is the total through it. Even the same number of levels guarantees neither the same quantity nor the same price distance. [3]

A larger purchase may use more selling levels. CME’s cost model moves to further asks when the first level is insufficient; it does not calculate the cost when the available data cannot cover the full quantity. The missing remainder cannot honestly be priced at the last known quote. Even a complete snapshot calculation is only a model. Actual executions and fees determine the result. [3] [5]

New selling offers can arrive as purchases happen. A small visible stock of orders need not mean an equally small capacity to handle trades. CME illustrates this on its futures markets, where contracts for future settlement are traded; that is no guarantee for a particular bitcoin exchange. Depth is a state at a moment, while traded volume is a flow over time. Offers can be replenished, but cancellations can also remove them quickly. [4]

Jana needs matching units, price bands and time methods. An instant snapshot is not the same as an average over a period. CFA describes trading spread across venues, along with execution costs and delays. Adding offers from different exchanges does not therefore produce a purchase Jana can necessarily make: she needs access, funds and the ability to meet each venue’s trading conditions. [5] [3]