Large-Order Dominance as a Short-Term Reversal Factor

Summary

The document proposes a factor based on order-book imbalance and trading activity. It defines large orders using displayed volume across the first three bid and ask levels, identifies minute bars when buying volume exceeds selling volume, and weights returns during those periods by volume. Average transaction size, approximated by traded value divided by trade count, is included to reflect order scale. The combined measure is negated so that strong buying pressure maps toward a potential reversal signal.

The suggested interpretation is that aggressive buying may push prices up temporarily and leave them vulnerable to a pullback, making the reversed factor relevant to short-term mean reversion. The note explains the factor’s intended construction and intuition but gives no tested results, formula conventions, holding period, or treatment of trading costs. Displayed depth and transaction-size measures may also vary by venue and data quality, so the signal requires precise definitions and validation before use.

Key ideas

• The factor combines order-book buying imbalance, volume-weighted returns, and average trade size.
• Displayed depth in the first three bid and ask levels is used to characterize large orders.
• The combined measure is inverted to target possible pullbacks after forceful buying.
• The proposed use is as a short-term reversal signal.
• The document provides no backtest or operational details such as holding period and costs.

Tags

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