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Multi-Level Order-Flow Imbalance and Limit Order Book Price Changes

Article arXiv papers · Author: Ke Xu et al.
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Summary

The document examines multi-level order-flow imbalance, a vector measure of net buying and selling activity across several price levels in a limit order book. It fits a simple linear relationship between this measure and contemporaneous mid-price changes, using data for six liquid Nasdaq stocks. The central finding is that out-of-sample goodness of fit improves as additional book levels are included in the imbalance measure.

This result suggests that order activity deeper in the book may contribute information about price formation beyond activity at the best quotes. The evidence is limited to the stated sample and model: the text does not provide effect sizes, forecast horizons, trading costs, or profitability tests. Because the relationship is contemporaneous, it should not be read on its own as evidence of predictive power or a tradable signal. The study offers a market microstructure finding, while leaving practical strategy design and generalization to other securities or venues unresolved.

Key ideas

  • Multi-level order-flow imbalance summarizes net buy and sell flow across price levels in a limit order book.
  • The study relates this measure linearly to contemporaneous mid-price changes.
  • The analysis uses data for six liquid Nasdaq stocks.
  • Out-of-sample fit improves when more price levels are included in the imbalance measure.
  • The reported relationship does not by itself demonstrate forecasting ability or net trading profitability.

Tags

EquitiesMarket microstructureStatisticsUS markets
Full text
# Multi-Level Order-Flow Imbalance in a Limit Order Book


# Multi-Level Order-Flow Imbalance in a Limit Order Book









We study the multi-level order-flow imbalance (MLOFI), which is a vector quantity that measures the net flow of buy and sell orders at different price levels in a limit order book (LOB). Using a recent, high-quality data set for 6 liquid stocks on Nasdaq, we fit a simple, linear relationship between MLOFI and the contemporaneous change in mid-price. For all 6 stocks that we study, we find that the out-of-sample goodness-of-fit of the relationship improves with each additional price level that we include in the MLOFI vector. Our results underline how order-flow activity deep into the LOB can influence the price-formation process.

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.