Using Order Book Imbalance and Order Flow to Study Price Moves
Summary
This article explains two limit order book signals. Volume imbalance compares displayed quantity at the best bid and ask, scaled so that positive values indicate relative bid-side pressure and negative values indicate ask-side pressure. Order flow imbalance instead tracks changes in displayed quantity at those best prices, distinguishing changes associated with quote movements from changes at an unchanged quote. The resulting signed changes can be accumulated over time or extended across multiple book levels.
The cited analyses report relationships between these measures and subsequent price changes: one uses a quarter of order-flow data, and another examines one instrument over 2014, relating imbalance to mid-price moves over the following ten milliseconds after market orders. The article describes regression as a way to test the predictive information in order flow and says deeper levels may add information. These are associations from cited studies, not evidence of a profitable strategy; the reported average price moves remain within the bid-ask spread, and richer order-level data may be costly or restricted.
Key ideas
- Best bid and ask volumes can be combined into a signed measure of displayed volume imbalance.
- Order flow imbalance focuses on changes in top-of-book volume rather than the entire stock of displayed orders.
- Quote changes affect how new bid-side and ask-side volume changes are calculated.
- Cited studies find that imbalance is associated with short-horizon mid-price direction, while average moves remain within the spread.
- Adding multiple order book levels may provide information beyond the best bid and ask alone.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.