Inferring Stock Order Book Pressure from Intraday Trades

Summary

The note describes a way to turn high-frequency trade data into a daily measure of stock order book pressure. It uses intraday tick price movements to identify displayed orders above and below traded prices, aggregates these observations at the close, and removes orders that were executed. The resulting expanded book is used to compare buy-side and sell-side pressure.

The reported analysis associates buy pressure dominance with positive short-term excess returns and sell pressure dominance with negative short-term excess returns. Returns reverse after the imbalance fades, which the note interprets as temporary price impact rather than a persistent effect. It also describes an event-driven strategy based on dominant buy pressure and reports historical performance for a ten-channel variant through April 2017. The underlying report is linked but not reproduced, so methodological details and validation evidence are limited; the note cautions that historical backtests do not promise future results.

Key ideas

• Intraday trade prices can be used to infer and aggregate additional order book information at the daily level.
• The method removes orders that traded before calculating remaining buy and sell pressure.
• Buy pressure dominance is associated with positive short-term excess returns, while sell pressure dominance is associated with negative returns.
• Returns reverse after pressure imbalance disappears, suggesting the effect may be a temporary market impact.
• The reported strategy results are historical and do not guarantee future performance.

Tags

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