Order-Size-Weighted Microprice and Best-Level Liquidity

Summary

The document explains why the microprice weights the best ask and bid prices using the displayed sizes at those levels. Those sizes carry information about available liquidity and the relative pressure in the top of the order book; replacing them with fixed weights would discard that information. The measure can therefore respond to an imbalance between bid and ask quantities as well as to the quoted prices.

A small order posted at an unusually aggressive price can still move the microprice because the calculation uses the best prices and their sizes. Its small size limits its weight relative to larger displayed liquidity, and ongoing order-book changes may reduce its effect. The discussion is a qualitative explanation, not an empirical validation or a guarantee that order size predicts subsequent price changes. The microprice reflects only the inputs included in its calculation and can be affected by transient or misleading quotes.

Key ideas

• The microprice weights the best bid and ask using their displayed sizes.
• Fixed size weights would discard information about liquidity at the top of the book.
• A small aggressive quote can influence the measure, though its displayed size limits its relative weight.
• The microprice changes as the order book changes and is not a guarantee of future price direction.

Tags

# Micro Price vs multi-level micro price


# Micro Price vs multi-level micro price












Why do we use the micro price $$p_m = \frac{B_{\text{size}} A_{\text{price}} + A_{\text{size}} B_{\text{price}}}{ A_{\text{size}} + B_{\text{size}}}$$ rather than fixing $A_{\text{size}}$ and $B_{\text{size}}$ to some constant and weighting the $A_{\text{price}}$ and $B_{\text{price}}$ to this value? Does the micro price not suffer if someone places a new low ask/high bid, but in small size?

## Answer by Hans-Peter Schrei (score 0, accepted)

https://quant.stackexchange.com/a/74961

If you fix $A_{\text{size}}$ and $B_{\text{size}}$ to a constant, you would lose the information about the liquidity available at the best bid and ask levels. This could lead to an inaccurate representation of the market's sentiment, as larger or smaller orders at the best bid and ask prices might have a significant impact on price movements.

The micro price may indeed suffer if someone places a new low ask or high bid but in a small size, as it would affect the weighted average calculation. However, this issue is mitigated to some extent by considering the order sizes in the calculation. Large orders will have a greater influence on the micro price, while small orders will have a lesser impact. Additionally, the micro price is continuously updated as the order book changes, so the influence of small, potentially anomalous orders will likely be temporary.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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