Is there a way to anticipate order flow on a security. For simplicity's sake i'm referring to a security that is traded on one exchange and has a single order book, by anticipating order flow i mean is there any way to evaluate the size and direction (buy / sell) of the next order placed in real time?
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$\begingroup$ Just wanted to clarify that orders are not some byproduct of price movements, the order flow (including limit orders) is the only thing that affects the price. Exchanges don't move the price, they just match orders. Also, the matching algorithms are public and can be easily implemented $\endgroup$– SergCommented Apr 20, 2020 at 11:33
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$\begingroup$ Everything you say is true @Serg but i fail to see it's relevance to the question, that might be my fault though if the question i asked isn't clear. $\endgroup$– BlackStarCommented Apr 20, 2020 at 11:47
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$\begingroup$ It's one of those things, where people who know the answer will never tell, since it's very profitable. $\endgroup$– LazyCatCommented May 20, 2020 at 13:36
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$\begingroup$ @LazyCat, what I meant to say is that answering this question is equivalent to giving a perfect forecast not just for the price, but for any of thousands of so called signals and indicators. I don't have such an answer and don't thing anyone has. And surely it wouldn't be just published as an answer, i.e. "we thought no one is interested, but since you asked, here it is!" So, my comment is relevant and probably is the only correct answer, though formally it isn't an answer $\endgroup$– SergCommented Jun 7, 2020 at 14:56
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2 Answers
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If by order flow you mean high-frequency changes in prices, returns, volume, and other variables based on intraday data at various levels of market depth, yes there are various approaches that have been developed, typically falling under two categories: behavioral approaches, which try to model order flow by simulating trader behavior, often with agent-based models that entail unrealistic assumptions, and statistical approaches which rely on quantitative measures that often take into account averaged tick-by-tick distributions of the limit order book variables by using order data besides the target variable for features. The Poisson process is a common but naive starting point for modeling order flow. Order flow can mean any one of a number of variables taken or derived from the order book though, so it will all depend on which one you want to anticipate. Quantitative finance publishes research on order book models.
answered Apr 20, 2020 at 1:45
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Welcome BlackStar,
It is really interesting topic to modelling orderbook dynamics and trade dynamics. There are a lot of works related to the family of processes called Hawkes processes. Those models connected with trades try to find information using clustering behavior of the trades. Also duration processes such as ACD processes should be interesting for you. You should also consider retrieving information from orders and liquidity in orderbook but here I will leave you with this topic alone. Interesting applcation of the Hawkes process was used in paper "Modelling trades-through by Hawkes process" where author try to model market orders that went through (I do not know if this is appropriate expression) first line in orderbook.
