Order Imbalance with Trade Flow Decomposition

• Lu, Reinert, and Cucuringu, 2022. Trade Co-occurrence, Trade Flow Decomposition, and Conditional Order Imbalance in Equity Markets

1. Introduction

• For any stock, the conditional order imbalance is defined as $$COI = \frac{N_{buy} - N_{sell}}{N_{buy} + N_{sell}}$$

• where $N_{buy}$ and $N_{sell}$ denote the total number of market buy orders and market respectively.

• We now decomposite trade into different types,

  • isolated: Trades are labelled as isolated if they do not co-occur with any other trades.
  • non-isolated: Otherwise, trades are labelled as non-isolated.
    • non-self-isolated: the co-occurrence neighborhood contains only trades of the same stock;
    • non-cross-isolated: the co-occurrence neighborhood contains only trades of different stocks;
    • non-both-isolated: the co-occurrence neighborhood contains only trades of same and other stocks

• For each identified trade type, we can compute the order imbalance. The regression R square is higher if we use 3 types of non-isolated COI and the isolated COI.