# How to understand micro-price (aka, weighted mid-price)?

The definition of micro-price is

S = Pa * Vb / (Va + Vb) + Pb * Va / (Va + Vb)


where Pa is the ask price, Va is the ask volume, Pb is the bid price, and Vb is the bid volume.

The typical explanation for micro-price is that a larger quantity of shares on the bid than on the ask indicates greater buying pressure, and therefore the "true" price is closer to the ask than to the bid.

But my confusion is: The bid price should be hit by the aggressive sell orders, so the "true" price should still be closer to bid, opposite to the definition of micro-price.

Could anyone help to explain?

• You are right, but nobody knows if aggressive market sell or market buy orders are about to hit or not. If all we can observe is the limit order book, it makes sense to assume that the market buy/sell orders that will arrive are going to be roughly matched and use the quantities at the bid and ask to try to predict which way the price is going to go. It is only a heuristic; a big market sale can cause the price to go down even though the bid queue is much bigger than the ask queue. A comparison of the queues on both sides only tells you which side is more vulnerable, not who is going to win. Jan 11 '20 at 16:37
• @noob2 Thanks. So you both agree with and disagree with the definition of microprice. But then why do people still use such definition to build their trading algorithm? Jan 12 '20 at 2:35