Trading strategies via book imbalance

The imbalance between bid and ask orders in a limit order book tends to predict trade arrivals and price movements. Alex Lipton, Umberto Pesavento and Michael Sotiropoulos calculate probabilities of price movements given the level of book imbalance, and find it can be useful for brokers’ short-term optimal trading strategies

The prevalence of electronic trading has radically changed the market structure in several asset classes, most notably in equities and futures. All market participants in a public electronic venue contribute to price formation by adding and removing liquidity in a limit order book, which ranks the buy and sell orders.

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