The Price Impact of Order Book Events

Abstract

We study the price impact of order book events -limit orders, market orders and cancelations -using the NYSE TAQ data for 50 U.S. stocks. We show that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between supply and demand at the best bid and ask prices. Our study reveals a linear relation between order flow imbalance and price changes, with a slope inversely proportional to the market depth. These results are shown to be robust to seasonality effects, and stable across time scales and across stocks. We argue that this linear price impact model, together with a scaling argument, implies the empirically observed "square-root" relation between price changes and trading volume. However, the relation between price changes and trade volume is found to be noisy and less robust than the one based on order flow imbalance.

The Information Content of Volume Price Impact for Intraday Liquidity Forecasting

“…At the beginning of the continuous trading day, volume price impact is significantly higher. This is consistent with Cont et al (2011) who show that there is lower depth in the morning because of information asymmetry.…”

“…Consistent with Cont et al (2011), we show that trade-based and order bookbased liquidity measures are informative of forthcoming price impact. We also find support for Jain et al (2011) who show that the order book bid side is more informative than the ask side.…”

“…Finally, Cont et al (2011) outline order book-based and trade-based measures are both informative of future price impact. They show that highly correlated market orders lead to momentum while limit orders lead to range-bound market.…”

Optimal Placement in a Limit Order Book

“…For instance, the price impact of a market order is generally believed to be larger than that of a limit order, and the empirical study by Cont et al [19] suggests that the price impact is more or less linear at the trade level.…”

“…Order flow imbalance could be a strong indication of the market momentum. Recently, Cont et al [19] examined the roles of order flow imbalance, trade imbalance, and the depth of LOB in affecting the price and found that order flow imbalance is a more general metric than the other two in limit order executions. Volume synchronized probability of informed trading (VPIN) is one of the well-known indicators developed by Easley et al [22] for modeling order flow imbalance.…”