Trade Execution Flow as the Underlying Source of Market Dynamics

TL;DR

This paper shows that execution flow is a key driver of market dynamics, introducing a numerical framework to analyze it and validate findings on real market data.

Contribution

It develops a novel method to calculate execution flow from market data and introduces an invariant framework based on Christoffel functions as an alternative to PCA.

Findings

Execution flow is fundamental to market dynamics.

The framework can automatically identify actionable thresholds.

Validated on actual market data.

Abstract

In this work, we demonstrate experimentally that the execution flow, $I = dV/dt$, is the fundamental driving force of market dynamics. We develop a numerical framework to calculate execution flow from the data using the Radon-Nikodym derivative. A notable feature of this approach is its ability to automatically determine thresholds that can serve as actionable triggers. The technique also determines the characteristic time scale directly from the corresponding eigenproblem. The methodology has been validated on actual market data to support these findings. Additionally, we introduce a framework based on the Christoffel function spectrum, which is invariant under arbitrary non-degenerate linear transformations of input attributes and offers an alternative to traditional principal component analysis (PCA), which is limited to unitary invariance.