Order Book Weighted Prices for Futures Micro-Pricing
Summary
The document discusses building a micro-price from limit order book data to forecast short-term prices in futures and related instruments. It proposes progressively richer weighted-price estimates: start by incorporating best bid and offer quantities, then calculate weighted bid and ask prices across multiple book levels and average them. A volume-weighted book price is another suggested starting signal for imbalance between buyers and sellers.
The replies caution that displayed volume can be misleading. A participant may place large orders far from the midpoint, distort a whole-book weighted average, and cancel those orders before execution. One proposed response is to regularize the calculation by excluding suspicious extreme volume, with examples of spoofing to investigate before adding complexity. These are exploratory suggestions rather than a validated forecasting model: the text provides no formal formula for the multi-level variant, test results, or treatment of execution momentum and related-contract information.
Key ideas
- A top-of-book weighted midpoint is a simple starting point for a futures micro-price.
- Multi-level weighted bid and ask prices can incorporate more depth before taking their average.
- A volume-weighted book price may reflect order imbalance relative to the midpoint.
- Displayed depth can be distorted by large orders that are canceled before execution.
- Regularizing the calculation to reduce extreme-volume effects is a possible safeguard, but the document gives no tested specification.
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# Micro-pricing of futures # Micro-pricing of futures I’ve heard that a lot of HFT's use so a called micro price for making predictions for futures and other product. Basically it converts the LOB and order message to a single number. I know it is kind of secret for each trader and might not be easy to get start on my own, but I wonder if there is any publication that could give me a head start, especially on pricing a contract with its own books and some related contracts books. I am aware that in academia the term micro price is a term for a very simple model which only consider the top of book price and quantity. I am looking for something that would incorporate multi level of book, and execution momentum as well. Thanks Mat ## Answer by Ezy (score 2) https://quant.stackexchange.com/a/50383 First approximation: use weighted mid using bbo quantities. Next approximation: use multi-level weighted bid price and weighted ask price and take the mean of that. You can test a bunch of variations around this. ## Answer by Tanay Trivedi (score 1) https://quant.stackexchange.com/a/50381 As a start I would VWAP the book (not to be confused with the execution algorithm benchmark), as in multiply all the book prices by all the book volumes and divide to come up with a "volume aware" price. When there is a bias towards the buy side of the book, the VWAP will be higher than the mid price and you can use it as a signal to measure order imbalance. Problem is that a spoofer can very easily bias the book with no chance of actually executing their volume by dumping leveraged volume on one side far away from the mid price and forcing the value much higher than is rational and delivering a false positive signal. Trade on that, and you may end up buying or selling in anticipation of a big move only to find the volume go away and the spoofer happy to take the volume off your hands at a discount. An example is documented on this wonderful High Frequency Trading blog! . The answer may be to make a regularized average that eliminates some highly suspect volume off the extremes and not incorporate that into the metric. Find some examples of that spoofing before getting more sophisticated though, simpler is always better.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.