What does the depth of an order book (slippage) mean?
The depth of an order book shows how many buy and sell orders are available at various price points for a specific product, such as a cryptocurrency. It provides insight into the amount of supply and demand at different price levels.
What is a deep order book?
When there are many orders at various prices, we refer to it as a deep order book. This means:
- There is sufficient supply and demand.
- Large transactions can be executed without significantly affecting the price.
What is a shallow order book?
In a shallow order book, fewer orders are available. This can lead to:
- Rapid price changes when someone executes a large transaction.
- A higher likelihood of slippage (the difference between the expected and actual price of a transaction).
What is slippage?
Slippage occurs when a large transaction affects multiple price points in the order book. As a result, the final price may be higher (for a purchase) or lower (for a sale) than expected.
Why is this important?
The depth of an order book provides insight into price stability:
- A deep order book indicates a stable market with high trading activity.
- A shallow order book may indicate volatility and higher transaction costs due to slippage.