A Five-Level Order-Book Buy-Side Strength Factor

Summary

The article proposes a buy-side strength factor from minute-level order-book data. It combines price and displayed quantity at each of the first five bid levels, does the same for the first five ask levels, and forms a ratio of the bid-side total to the ask-side total. Values above or below one are presented as indications of stronger displayed buying or selling pressure, respectively. The example aggregates the ratio by instrument and date and excludes rows where the ask-side denominator is zero.

This is a simple measure of displayed liquidity imbalance, not proof of executed buying pressure or future price direction. The text provides no backtest or predictive statistics. Its prose describes averaging prices and quantities, while the calculation shown instead sums price-times-quantity products on each side. The aggregation sums minute-level ratios over a day, so interpreting the daily result requires care; the method also does not discuss order cancellations, hidden liquidity, or execution effects.

Key ideas

• The factor compares the summed price-times-quantity values across five bid levels with the corresponding five ask levels.
• A ratio above one is interpreted as greater displayed bid-side strength, while a ratio below one suggests greater ask-side strength.
• The example groups observations by date and instrument and filters out zero ask-side denominators.
• The daily aggregation sums minute-level ratios, which affects how the resulting value should be interpreted.
• The article supplies no evidence that the factor predicts returns or accounts for order cancellations and hidden liquidity.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.