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Using Order Imbalance Signals in Ultra-Short-Horizon Trading

Article Quant Q&A · Author: MaveRRick
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Summary

The question asks whether directional order-flow signals can help predict prices over very short horizons, including periods as brief as 100 milliseconds. The answer points to research on incorporating signals into optimal trading, using signed order imbalance as an example of a signal that can inform trading decisions.

The cited paper is described as including statistics in its final section, but the document gives no figures, experimental setup, or specific results. It therefore offers a research direction rather than evidence that order imbalance is profitable at the horizons in question. Applying the idea would require consulting the paper and accounting for market, instrument, data, and execution conditions; the brief answer does not establish how well the signal works at ultra-high frequencies.

Key ideas

  • Signed order imbalance is presented as an example of a directional trading signal.
  • Research on optimal trading can provide a framework for incorporating signals into execution decisions.
  • The document points to statistics in a cited paper but does not report their results.
  • The answer does not establish whether the signal is effective at horizons as short as 100 milliseconds.

Tags

High-frequency tradingMarket microstructureExecutionStatistics
Full text
# Answer by lehalle (score 1)


# What are some quantitative approaches to figure out Flow Based Alphas on extremely small lookout periods and does 'flow' play a significant role?












I was pondering over the dynamics of the Market Microstructure trying to couple it with some directional flow based alphas but for extremely small look out periods. Does it even make sense to go for flow based alphas for ultra high frequency(Look out periods upto 100 millis)? If yes then can someone provide some insights on how to approach and figure out these.

## Answer by lehalle (score 1)

https://quant.stackexchange.com/a/78637

there is this paper: Lehalle, Charles-Albert, and Eyal Neuman. "Incorporating signals into optimal trading" Finance and Stochastics 23 (2019): 275-311.

It explains how to use the kind of signal you have in mind in optimal trading. It is based on the imbalance signe, the last section of the paper gives a lot of statistics, like this one:

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.