Market Depth and Order Size

25 Pages Posted: 16 Apr 1997

See all articles by Olaf Korn

Olaf Korn

Georg-August-Universität Göttingen

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR)


In this paper we measure market depth by investigating the relation between net order flow and price changes. Two aspects are our main focus. Is the relation linear? Is the relation different for positive and negative net order flow? Answers to these questions are important for the design of market liquidity studies and for optimal trading. We use intraday data on German index futures. Our analysis based on a neural network model provides us with two main results. First, the relation between net order flow and price changes is strongly non-linear. Large orders lead to relatively small price changes whereas small orders lead to relatively large price changes. We provide an example which shows that the optimal trading strategy of informed investors depends crucially on whether the price impact is linear or not. Second, we find that buyer initiated trades lead to a smaller price change than seller initiated trades of the same size. This finding contradicts the assumption of a symmetric price impact of buy and seller orders which is commonly used in theoretical models. Overall, the results of our paper suggest that the assumption of a linear and symmetric impact of orders on prices is highly questionable. Thus, market depth cannot be described sufficiently by a single number. Therefore, empirical studies comparing liquidity of markets should be based on the whole price function instead of a simple ratio. A promising avenue of further theoretical research might be to allow the priceimpact per unit to depend on the trade volume. This should lead to quite different trading strategies as in traditional models.

JEL Classification: C45, G10

Suggested Citation

Korn, Olaf and Kempf, Alexander, Market Depth and Order Size. Available at SSRN: or

Olaf Korn (Contact Author)

Georg-August-Universität Göttingen ( email )

Platz der Göttinger Sieben 3
D-37073 Göttingen

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Cologne, 50923
+49 221 470 2714 (Phone)
+49 221 470 3992 (Fax)

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