Combining Five-Level Order Book Imbalance with Weighted Spread

Summary

This note describes a daily liquidity signal built from intraday order book snapshots. It sums bid and ask volumes across the first five levels, then measures their normalized imbalance as the difference divided by the total. Separately, it calculates weighted bid and ask prices, giving the nearest level the greatest weight, and expresses their gap as a proportion of the midpoint. The proposed factor multiplies the daily volume imbalance by the daily proportional spread.

The document provides SQL-style calculations that aggregate minute-level values by instrument and trading date. It offers a construction recipe, but no backtest, performance evidence, or guidance on how to interpret the factor’s sign or use it in a portfolio. Its signal therefore remains a proposed measure rather than a validated trading strategy. Results may depend on snapshot frequency, data quality, market structure, and whether wider spreads indicate useful information or simply higher trading costs.

Key ideas

• The volume imbalance compares summed bid and ask quantities across five book levels.
• The volume measure is normalized by total bid and ask volume.
• Weighted bid and ask prices assign more weight to nearer book levels.
• The proportional spread is calculated relative to the midpoint of the weighted prices.
• The final daily factor is the product of daily volume imbalance and proportional spread.

Tags

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