Low-Frequency Traders in a High-Frequency World: A Survival Guide

Abstract:     
Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.

The PIN Theory (Easley et al. [1996]) reveals the Microstructure mechanism by which:

– Market Makers adjust their trading range to avoid being adversely selected by Informed Traders.
– Informed Traders reveal their future trading intentions when they alter the Order Flow.
– Consequently, Market Makers’ trading range is a function of the Order Flow imbalance.

VPIN is a High Frequency estimate of PIN, which can be used to detect the presence of Informed Traders, monitor liquidity conditions and forecast microstructural volatility.

Number of Pages in PDF File: 41

Keywords: Market Microstructure, VPIN, Order Flow, Informed Traders, Liquidity Providers, Adverse Selection

JEL Classification: C02, D52, D53, G14

working papers series