41 Pages Posted: 23 Sep 2012 Last revised: 26 May 2014
Date Written: September 23, 2012
Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.
The PIN Theory (Easley et al. ) 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.
Keywords: Market Microstructure, VPIN, Order Flow, Informed Traders, Liquidity Providers, Adverse Selection
JEL Classification: C02, D52, D53, G14
Suggested Citation: Suggested Citation
Lopez de Prado, Marcos, Low-Frequency Traders in a High-Frequency World: A Survival Guide (September 23, 2012). Available at SSRN: https://ssrn.com/abstract=2150876 or http://dx.doi.org/10.2139/ssrn.2150876