Estimating Net Volume and Assessing Its Predictive Value
Summary
The document asks whether signed net volume could predict asset performance in a way that resembles the information carried by returns. It distinguishes ordinary gross volume from net volume, defined as buyer-initiated volume minus seller-initiated volume. One response describes using short-window net volume around personal executions to assess execution quality, but says it was not used for daily prediction. For classification, order-book executions can reveal which side initiated a trade; with only top-of-book data, comparing trade prices with the latest midpoint offers a less reliable approximation.
Other responses connect volume imbalance with market microstructure and indicators such as On-Balance Volume, while emphasizing that predictive usefulness may vary by instrument and should be backtested. The discussion offers no empirical test of daily forecasting power and does not establish that net volume reliably captures sentiment or predicts returns. Its practical takeaway is that signed volume must be constructed from trade-side information, and any predictive claim requires instrument-specific evaluation.
Key ideas
- Gross volume does not indicate whether buyers or sellers initiated trades.
- Net volume can be calculated as buyer-initiated volume minus seller-initiated volume.
- Order-book execution data supports trade-side classification, while midpoint comparisons are a rough substitute.
- Net volume can be useful for short-horizon execution analysis, but daily predictive power is not established.
- Volume imbalance indicators should be evaluated with instrument-specific backtests.
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Full text
# Does asset volume, rather than asset returns, predict performance? # Does asset volume, rather than asset returns, predict performance? Asset returns are the most common data type used in finance. They are derived from closing price data. Ordinary level 1 data for stocks not only consists of closing prices, but also gross volume traded in the security, however, which is the absolute sum of both the number of shares that were bought and sold by end-of-day. Assume there is a means of distilling gross volume into a net volume measure, that reports whether there was more buying (bid) activity than sell (ask) activity (executed transactions) by end-of-day, in other words, net volume is the change in magnitude and direction of trading activity. Would net volume be a good predictor of asset performance, in the same way that asset returns properly describe whether, and by how much, an asset's value is going up or down? based on the premise that investor sentiment (bullishness), captured in net volume/trading activity, should (but might not) drive/reflect an asset's value reliably? ## Answer by chrisaycock (score 2, accepted) https://quant.stackexchange.com/a/54529 The only time I've used net volume was for performance measurements of my own trading activity. Specifically, I was looking for the net volume traded 10 ms before my own execution vs 10 ms after my execution. That would indicate how ahead of my competitors I was in execution. I've never used such a metric for daily applications. As for how to compute net volume, I first had to determine whether the initiator of the trade (the person taking liquidity) was the buyer or seller: - The proper way to do this is simply by looking at executions in the order-book feed, since I know whether the liquidity provider posted a bid or ask. The opposite of the provider is the initiator's side. - With only top-of-book data, the poor man's way is to compare each trade to the most recent bid-ask midpoint. If the trade is greater than the mid, then assume the initiator was a buyer. Once I have the initiator, the net volume is the sum of buyer volume minus the sum of seller volume. I've never seen this information provided in a feed, so I've had to compute it myself. ## Answer by John (score 0) https://quant.stackexchange.com/a/54454 there is information there indeed, you can even get tick data with bid and offer prices and volumes. there are books on this, like the one below, haven't read any though. A Complete Guide To Volume Price Analysis: Read the book then read the market by Anna Coulling ## Answer by hbadger19042 (score 0) https://quant.stackexchange.com/a/54459 Net volume is an important indicator. It's related to the concept of informed traders of microstructure theory. And the volume indicators such as OBV are constructed from the considering the volume imbalance. The volume indicators are used together with price indicators. How much predictive power it has depends on the instruments you trade. You need to backtest your idea.
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