Order book and DOM (depth of market)

What it is

The order book holds every resting limit order: bids below the price, offers above it. The DOM (depth of market, or price ladder) shows it as a column of prices with the size waiting at each. Level 1 data is just the best bid and offer; Level 2 shows size at several prices (on CME, the top ten levels); Level 3 or market-by-order shows every individual order.

Two things make it hard to read. Icebergs are large orders that show only a small part and refill as it trades; on CME, an iceberg keeps the same order ID when it refills, so market-by-order data can track it, but any iceberg tool is still an estimate. And size can be pulled before price reaches it. Placing orders you intend to cancel to mislead others is spoofing (layering when done across several prices); it is illegal in the US under the Dodd-Frank Act, and JPMorgan paid about $920 million over it in 2020.

Spot forex has no central book. A broker's DOM shows only that broker's or its liquidity provider's orders, not the market's.

How to spot it

• Large sizes resting at a price stand out from their neighbours.
• Pulling: size disappearing as price approaches. Stacking: size being added ahead of price.
• An iceberg shows as more trading at a price than was ever displayed there.

How to use it

• Watch how a big resting order reacts as price arrives: does it trade through, pull, or hold and refill?
• Use it only at levels you already planned to trade, to fine-tune the entry.

Common mistakes

• Trusting displayed size; much of it is cancelled before it can trade.
• Watching the DOM all day without a plan, which leads to overtrading.

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