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Assume you're trying to buy at the bid and sell at the ask. The bid has a price and a volume on it, and so does the ask (volume of shares to buy/sell).

If you want to buy at the bid and then immediately sell at the ask, then you're doing short-term trading. The question is, is it possible to check short-term supply and demand by checking if the volume on the bid is higher than the volume on the ask? That means, is it possible to see if the price on the ask will stay the same or increase simply by just checking if the volume on the bid is higher than the volume on the ask?

Does that make sense?

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    What leads you to believe that you will be able to buy at the bid and then "immediately sell at the ask"? In addition, just because bid volume is larger than ask volume, that doesn't mean that share price will rise.
    – Bob Baerker
    Oct 14 at 18:00
  • What has stock-market trading to do with Personal Finance, please?
    – Robbie Goodwin
    Oct 16 at 22:00

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Unfortunately the information in the market depth (the bids and asks you can see in the trading platform) only represents the minimum number of shares that someone will buy or sell at a given price. There are three reasons why this does (or may) not represent a full picture of the market:

  1. It only includes "lit" volume - there is some liquidity that will be on the market but hidden by various means. The most popular of these is the "iceberg" order where you only show a proportion of the lots you wish to trade to the rest of the market. You enter this type of order specifically because you don't want to move the price with a large volume so you hide most of the volume. Not all markets support this type of order but it is very popular on the exchange I work for.
  2. It only includes volume that has already been sent to the market and is likely to only be prices from market makers. Some high frequency traders and others wait for a price movement before entering their orders and are able to do so at nanosecond speeds since they sit right next to the exchange. Since they can put orders in so quickly they don't tend to leave an order on the book for more than a second and this means that your analysis won't include this volume as it will enter the market quickly when it sees an opportunity and will likely trade before you can react, even if you are writing a trading bot, because it is unlikely you can afford to sit next to the exchange.
  3. Some participants wait for a price point and then enter a market order. Their volume will never show in the market depth as it is a market order.

Due to those factors you don't have a clear view of all of the volume on either side of the book and won't know where this hidden liquidity actually sits - it could be that the hidden liquidity on one side dwarfs the lit liquidity on the other. Furthermore, if the instrument you are trading is fairly liquid, by the time you react to the volume that you can see that information is likely to be outdated as the HFTs respond.

Two asides

  1. I'm not permitted to trade but as an exchange employee I can see lit and dark market depth and am still surprised by it sometimes. Dark (or unlit) market depth really can change your view of the market.
  2. I'm mortified by my typo and very thankful for the edit.
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