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  • sainsamridh_01

    •

    6 months

    Reading a DOM

    Hey, I've seen some people people confused by using a Depth of Market (DOM). I'm going to try to simplify it, by looking at an imaginary futures instrument and breaking down a single trading event step by step. https://i.redd.it/z4kw8e5yqf6e1.gif ‎ ‎ This instrument has 5 buyers at each price level at 50 and below, and 5 sellers at each level 50.01 and above. https://preview.redd.it/92b0exb2rf6e1.png?width=565&format=png&auto=webp&s=63591fbef181fa0c9a92c45d9933957e3543dcfd ‎ ‎ A trader places an order to buy 50 contracts at the current available price (50.01). Since only 5 contracts are available at that price, those 5 contracts are purchased, leaving a bid limit order open for the remaining 45 contracts. https://preview.redd.it/ha0vub25rf6e1.png?width=466&format=png&auto=webp&s=a17ff0e755fd0a8acde9f212008c12100ad1eec5 ‎ ‎ Sellers react in response to the increased buying demand. The limits from 50.02 to 50.04 are pulled and placed at a higher price. (an increase in demand usually causes higher prices) https://preview.redd.it/qv0mz29drf6e1.png?width=527&format=png&auto=webp&s=57ef3d814e60503c353d15038b612b678603b645 ‎ ‎ However Market Makers and/or HFTs see this bid ask spread and see opportunity to make a profit. They place 2 sell orders at 50.04 and 1 order each at 50.02 and 50.03. Odds are, someone will sell to them at 50.03 and buy from them at 50.04. https://preview.redd.it/kksa9oggrf6e1.png?width=515&format=png&auto=webp&s=31c172e5ed0ea5c41239d528af22f5bd0d4113c6 ‎ ‎ This event only serves as a hypothetical, but the fundamentals are the same, supply and demand. Understanding when market behavior diverges from expectations can provide trading opportunities.
    3

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