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Asset returns are the most common data type used in finance. They are derived from closing price data. Ordinary level 1 data for stocks not only consists of closing prices, but also gross volume traded in the security, however, which is the absolute sum of both the number of shares that were bought and sold by end-of-day.

Assume there is a means of distilling gross volume into a net volume measure, that reports whether there was more buying (bid) activity than sell (ask) activity (executed transactions) by end-of-day, in other words, net volume is the change in magnitude and direction of trading activity.

Would net volume be a good predictor of asset performance, in the same way that asset returns properly describe whether, and by how much, an asset's value is going up or down? based on the premise that investor sentiment (bullishness), captured in net volume/trading activity, should (but might not) drive/reflect an asset's value reliably?

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The only time I've used net volume was for performance measurements of my own trading activity. Specifically, I was looking for the net volume traded 10 ms before my own execution vs 10 ms after my execution. That would indicate how ahead of my competitors I was in execution. I've never used such a metric for daily applications.

As for how to compute net volume, I first had to determine whether the initiator of the trade (the person taking liquidity) was the buyer or seller:

  • The proper way to do this is simply by looking at executions in the order-book feed, since I know whether the liquidity provider posted a bid or ask. The opposite of the provider is the initiator's side.

  • With only top-of-book data, the poor man's way is to compare each trade to the most recent bid-ask midpoint. If the trade is greater than the mid, then assume the initiator was a buyer.

Once I have the initiator, the net volume is the sum of buyer volume minus the sum of seller volume. I've never seen this information provided in a feed, so I've had to compute it myself.

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  • $\begingroup$ Regarding the poor mans way, can it be deduced whether a buyer or seller was the initiator if only given daily OHLC and gross volume data, rather than intraday tick data? I guess im asking if daily (closing) net volume can be computed, and whether changes in daily net volume can be instructive of asset performance like changes in prices (returns) $\endgroup$ – develarist Jun 5 at 3:50
  • $\begingroup$ @develarist What you're asking for is not possible. You can't determine what happened during the trading day using just EOD data. $\endgroup$ – chrisaycock Jun 5 at 4:14
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there is information there indeed, you can even get tick data with bid and offer prices and volumes.

there are books on this, like the one below, haven't read any though.

A Complete Guide To Volume Price Analysis: Read the book then read the market by Anna Coulling

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  • $\begingroup$ by tick data do you mean high-frequency? if so, i am only looking in terms of a low-frequency (daily, weekly, monthly) application. $\endgroup$ – develarist May 27 at 12:53
  • $\begingroup$ if you have tick data, it means that you have all the data available, every time there is a transaction, therefore you can deduct daily weekly etc. by aggregation $\endgroup$ – John May 27 at 12:54
  • $\begingroup$ yes, high-frequency data = tick data. but the question is does asset volume reliably convey asset performance like how asset returns do? more specifically, level 1 low-frequency volume $\endgroup$ – develarist May 27 at 12:57
  • $\begingroup$ yes of course it takes volume to move prices, there is noise though, just like for the price data, hence both should be analysed jointly $\endgroup$ – John May 27 at 13:04
  • $\begingroup$ ok fair enough, volume moves prices. but asset returns define price movement already. so why would looking at volume as a replacement for asset returns to define asset value movement provide any advantages? also considering the fact that investor sentiment is hardly ever always right and is often manipulative (large bidding activity might be malicious and not truthful like returns) $\endgroup$ – develarist May 27 at 13:07
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Net volume is an important indicator. It's related to the concept of informed traders of microstructure theory. And the volume indicators such as OBV are constructed from the considering the volume imbalance. The volume indicators are used together with price indicators. How much predictive power it has depends on the instruments you trade. You need to backtest your idea.

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  • $\begingroup$ what is obv? and how good is prediction power if the instruments traded are just stocks, given that some stocks are highly liquid, while others have low liquidity $\endgroup$ – develarist May 27 at 15:01
  • $\begingroup$ @develarist There are various volume indicators. Google would help you better. The prediction power depends on how you apply the indicator. There are various ways to do it. Different people use it in a different way. You should develop your own way. The point is the volume indicators carry important information on the market. $\endgroup$ – kevin012 May 28 at 0:18

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