Combining Five-Level Order Book Depth with Three-Day Momentum

Summary

This document describes a stock factor that combines the relative value of bid and ask liquidity across the first five order book levels with a short-term price trend. It sums price times volume on each side, converts the bid-to-ask value ratio into an imbalance, and adjusts that signal according to whether it agrees with the three-day price direction. Agreement strengthens the signal; other cases reduce it. The result is clipped to a fixed range, then averaged across each stock’s intraday observations to produce a daily factor.

The document provides the formula and SQL-style implementation, but no empirical test results or evidence that the factor predicts returns. Its weighting choices are specified rather than justified, and the description does not discuss transaction costs, order book data quality, or sensitivity to sampling and aggregation. The method is therefore a factor construction proposal, not evidence of a validated trading strategy.

Key ideas

• The factor compares the notional value of bid and ask liquidity across five order book levels.
• It scales the imbalance according to whether it agrees with the recent three-day price direction.
• The adjusted intraday signal is clipped and averaged by stock and day.
• The document gives implementation details but no performance validation or robustness analysis.

Tags

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