Anatomy of the DOM

DOM stands for Depth of Market. It is the order book drawn as a vertical ladder, with prices in the middle, resting bids on one side and resting asks on the other. Most platforms add columns for volume traded at each price and for your own orders. This lesson walks through the ladder column by column so that when we start reading behaviour in the next lesson, the layout is second nature.

The ladder

  Vol  | Bid  | Price   | Ask  | Vol  | Notes
  -----+------+---------+------+------+---------------------------
   410 |      | 5001.25 |  155 |      |
   820 |      | 5001.00 |  240 |      |
   960 |      | 5000.75 |  190 |      |
  1330 |      | 5000.50 |  120 |      |
  1780 |      | 5000.25 |   85 |   62 | <- best ask; 62 traded here so far
  1650 |  130 | 5000.00 |      |  118 | <- best bid; 118 traded here
  1120 |  210 | 4999.75 |      |      |
   870 |  180 | 4999.50 |      |      |
   540 |  265 | 4999.25 |      |      |
   310 |  205 | 4999.00 |      |      |

Columns, from left to right in this layout (platforms vary):

• Vol (left): total volume traded at each price for the session. This is the volume profile drawn as numbers. It accumulates all day and never shrinks.
• Bid: resting buy limit orders at prices at or below the best bid.
• Price: the ladder. Ticks are the minimum increment; here 0.25.
• Ask: resting sell limit orders at prices at or above the best ask.
• Vol (right, at the inside): some platforms show volume traded at the current bid and ask since price arrived there. It resets when price moves. This is the column that shows absorption happening.

The empty cells in the bid column above the best bid, and in the ask column below the best ask, are structural: nobody can rest a buy limit above the best offer without it being filled immediately.

Depth

"Depth" is how far down the ladder resting orders extend and how large they are. A deep book has large size at many levels; a shallow book has small size and gaps. Depth tells you how much aggression it would take to move price a given distance.

Sum the ask side of the book above: 85 + 120 + 190 + 240 + 155 = 790 contracts within five ticks. If a buyer wanted to push price to 5001.50 with market orders they would need to consume all 790, and that is before anyone adds or pulls. On the same product an hour after the open the same five levels might hold 4,000; at 3 am they might hold 150. Depth is not a fixed property of a product. It changes through the session, and reading it means knowing what is normal for the time of day.

Displayed size versus "real" size

The bid and ask columns show displayed size only. Lesson 4 of Module 1 covered why that can be misleading. The Vol columns show what traded, which cannot be faked. The core DOM skill is comparing the two:

Only the first and fourth rows mean what the displayed number said. The second and third are the interesting ones, and they are what the next two lessons are about.

Key idea: The DOM has two kinds of numbers: what people say they will do (bid and ask columns) and what actually happened (volume columns). Reading the DOM is the practice of comparing them.

What the DOM is good and bad at

Good at:

• Showing where displayed liquidity is thick or thin in the next few ticks.
• Showing size being added or removed as price approaches a level.
• Showing, on the inside columns, whether a level is absorbing or being eaten.

Bad at:

• Showing intent more than a few ticks away; deep levels are frequently cancelled before price arrives.
• Anything on very liquid products where thousands of orders change every second (covered in lesson 4).
• Telling you why size is there. A 500-lot bid could be a hedge, a spoof, a passive institution, or an algo's clip.

The DOM is a microscope. It is precise about the next few ticks and nearly useless about the next few hours. Volume profile (Module 4) is the telescope. You need both, and confusing their ranges is a common way to lose money: using the DOM to make swing decisions or the profile to make tick decisions.

Time and sales alongside

Most DOM layouts include a scrolling time and sales window: each print with time, price, size and whether it hit the bid or lifted the ask. Module 3 is devoted to it. For now, note that the DOM shows the state of the book while time and sales shows the events that change it. Watching both is like watching a scoreboard and the play at the same time.

Try it: Open a DOM on a product you can get data for. Take a screenshot at three different times: the first 15 minutes of the main session, mid-session, and the last 15 minutes. For each, sum the displayed size in the five levels above and five levels below the inside market. Note how much depth changes, and whether the bid side and ask side are symmetrical.

Recap

• The DOM is the book drawn as a ladder: resting bids on one side, resting asks on the other, prices in the middle.
• Volume-traded columns are facts; bid and ask columns are displayed intent and can change or vanish.
• Depth is the total resting size over a range of prices and varies heavily with time of day.
• Reading the DOM means comparing what was displayed with what actually traded and what price did.
• The DOM is precise over ticks and near-useless over hours; use it for the microscope's job only.