Estimating Buyer- and Seller-Initiated Trading from Quotes

Summary

The question asks whether the quantities displayed on the ask and bid sides of an order book can measure short positions as a share of market activity. The answer redirects the analysis from resting orders to completed trades: match trade ticks with the best bid and offer that prevailed at the time, then infer which side initiated the trade from its price relative to the spread.

A trade at or above the spread midpoint is treated as buyer initiated, while one below it is treated as seller initiated. This offers a way to classify order flow, but it does not identify whether a seller is opening a short position or closing or reducing a long one. Resting ask orders likewise do not reveal the trader’s position or directional belief. The proposed method is a heuristic based on quotes and trade prices, and the document does not discuss quote timing, midpoint trades, data quality, or how classification accuracy varies across markets. It is therefore a measure of likely trade initiation, not a direct measure of the market’s short exposure.

Key ideas

• Resting ask and bid quantities do not reveal whether traders are short or long.
• Trade ticks can be compared with contemporaneous best bid and offer quotes to infer the initiating side.
• Trades above the spread midpoint are classified as buyer initiated, and those below as seller initiated.
• Trade initiation classification does not establish whether the seller opened or closed a short position.

Tags

# Calculating short/long order percentages?


# Calculating short/long order percentages?












I have a feed in real time that lists the ask and bid orders.

Each order consists of a value and a quantity.

I want to calculate the percentage of short orders from the total orders in terms of quantity.

So far i have this:

```
    Sum(askOrderQuantities)/( Sum(askOrderQuantities+ Sum(bidOrderQuantities))
```

As far as i know selling is not the same as short. most ask orders are way above market price. This means that they will not go through anytime soon. Does this mean they are long because the seller is betting the price will go up?

Edit: I am trying to find a percentage that represents people going short of the total market, weighing in the quantity they are using. This is for the forex market. I have the following data in real time:

```
   Order sheet
   Ticker
   Market trade history
```

## Answer by Jason Guevara (score 1)

https://quant.stackexchange.com/a/14409

Perhaps you might have to "match" Tick data to the best bid/offer to see which price(s) go through... If say the spread is 35.50/36.50 and the tick at that moment is 36.50 then we can consider this to be "buyer initiated" and of course if the tick is 35.50 then it becomes "seller initiated". That is to say if the price is above the average of the current spread we can consider it to "buyer initiated" and "seller initiated" if the price is below the average best bid/offer.

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