Testing Level 2 Trade-Flow Factors for Stock Selection

Summary

This research summary explores stock-selection signals built from Level 2, trade-by-trade data. It classifies trades by order size and direction, then constructs measures such as the share of trading represented by different order categories and net buying ratios. The aim is to assess whether these intraday measures can help distinguish subsequent stock returns beyond short-term applications.

The reported tests find stronger results for trading-share factors than for net-buying ratios. Higher continuous-auction, medium-order, and small-order shares are associated with higher returns in the next month, while lower very-large-order and large-order shares are associated with higher returns. The summary reports attractive long-short statistics for several share factors, whereas net-buying measures generally perform weakly, apart from a closing-period measure. Share factors also correlate with size, reversal, and turnover characteristics; after removing those exposures through cross-sectional regression, the reported selection effect remains. These are historical backtest findings in a report summary, not a guarantee of future performance.

Key ideas

• Trade-by-trade data can support factors based on trade size and buyer- or seller-initiated direction.
• Trading-share factors reportedly separate next-month stock returns better than net-buying ratios.
• Higher medium- and small-order shares are associated with stronger subsequent returns in the reported tests.
• The factors correlate with size, reversal, and turnover, so the study tests residualized versions.
• The reported performance is historical and may not persist in other market conditions.

Tags

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