Trade arrival dynamics and quote imbalance in a limit order book

TL;DR

This paper investigates how the imbalance between bid and ask queues in a limit order book influences trade arrivals and price movements, proposing a stochastic model calibrated with real data.

Contribution

It introduces a novel stochastic model capturing the joint dynamics of order book queues and trading activity, with a semi-analytic method for event probability estimation.

Findings

Model accurately fits historical data

Quote imbalance predicts trade arrivals

Quantifies probability of price movements

Abstract

We examine the dynamics of the bid and ask queues of a limit order book and their relationship with the intensity of trade arrivals. In particular, we study the probability of price movements and trade arrivals as a function of the quote imbalance at the top of the limit order book. We propose a stochastic model in an attempt to capture the joint dynamics of the top of the book queues and the trading process, and describe a semi-analytic approach to calculate the relative probability of market events. We calibrate the model using historical market data and discuss the quality of fit and practical applications of the results.