Market Impact as Anticipation of Order Flow Imbalance

Summary

The document presents a model connecting the price impact of large metaorders to the dynamics of market order flow. It assumes permanent impact is linear and prices follow a martingale, then derives how prices evolve from the order flow under those assumptions.

For a nearly unstable Hawkes process, the framework produces persistent order-flow signs and a power-law impact response consistent with the square-root law. It also relates the persistence exponent of signed market orders to the impact exponent. These are theoretical implications of the stated assumptions, not a trading rule or evidence of directly measured performance. The approach does not require traders to identify when a metaorder begins, though its conclusions depend on the linear-impact and martingale hypotheses.

Key ideas

• The model derives price dynamics from market order flow under linear permanent impact and martingale-price assumptions.
• A nearly unstable Hawkes process can generate long memory in order signs and a power-law impact function.
• The derived impact behavior is consistent with the square-root law.
• The framework links the long-memory exponent of signed orders to the impact-function exponent.
• The analysis does not assume market participants detect the start of metaorders.

Tags

# Market impact as anticipation of the order flow imbalance


# Market impact as anticipation of the order flow imbalance









In this paper, we assume that the permanent market impact of metaorders is linear and that the price is a martingale. Those two hypotheses enable us to derive the evolution of the price from the dynamics of the flow of market orders. For example, if the market order flow is assumed to follow a nearly unstable Hawkes process, we retrieve the apparent long memory of the flow together with a power law impact function which is consistent with the celebrated square root law. We also link the long memory exponent of the sign of market orders with the impact function exponent. One of the originalities of our approach is that our results are derived without assuming that market participants are able to detect the beginning of metaorders.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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