Choosing a Weighted Midpoint Formula to Infer Order Book Signals

Summary

The document addresses an apparent disagreement between two weighted-midpoint formulas that combine top-of-book prices and displayed sizes. Its response argues that the appropriate interpretation depends on what the measure is meant to capture. A size imbalance can be read as current market sentiment, or it can be interpreted as information about where price may move next when the displayed quotes are assumed to come from informed market makers.

For a trading use focused on anticipated price movement, the response favors the latter interpretation: greater bid-side size is treated as a signal of upward movement, so the weighted midpoint should reflect a price above the ordinary midpoint. This is a conceptual explanation of how assumptions and purpose affect formula choice, not an empirical validation. The document does not quantify predictive performance or establish that displayed size reliably indicates informed intent; the interpretation depends on market context and the goal of the measure.

Key ideas

• The intended use of a weighted midpoint affects which formula interpretation is appropriate.
• Displayed size imbalance can represent current sentiment or a directional signal, depending on assumptions.
• The response favors interpreting stronger bid size as an upward signal for trading purposes.
• The proposed interpretation assumes displayed quotes convey useful information about future price movement.
• No empirical evidence is given that the signal predicts returns reliably.

Tags

# Question about weighted midpoint formula


# Question about weighted midpoint formula












The answers from these two replies seem to contradict each other. The first numerator is bidSizebidPrice + askSizeaskPrice but the second is bidSizeaskPrice + askSizebidPrice.

Price functions based on order book events

Control for bid/ask bounce in high-frequency trade data?

Does anyone know what I'm missing here?

Edit: I think the 2nd link above is correct formula but I'm likely misreading first link. This because this paper seems to agree with 2nd link: http://home.uchicago.edu/~shim/Papers/HFT-FrequentBatchAuctions.pdf

## Answer by chrisaycock (score 6)

https://quant.stackexchange.com/a/9479

It depends on your goal. Suppose we have a stock whose top-of-book quotes show far more size on the bid than on the ask.

If you want the weighted mid to reflect sentiment at this moment, then certainly the market participants agree that the fair price is less than the mid.

However, if you assume that these participants are informed market makers and your goal is to infer momentum, then the participants believe that the price will revert upwards. I.e., the fair price is higher than the mid.

For trading purposes, I would go with the second one. If I see dealers quoting more on the bid than ask, then I will assume that the price will increase over time, so I want my weighted mid to reflect that.

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