The Micro-Price: A High Frequency Estimator of Future Prices

Abstract

I define the micro-price to be the limit of a sequence of expected mid-prices and provide conditions for this limit to exist. The micro-price is a martingale by construction and can be considered to be the ‘fair’ price of an asset, conditional on the information in the order book. The micro-price may be expressed as an adjustment to the mid-price that takes into account the bid-ask spread and the imbalance. The micro-price can be estimated using high frequency data. I show empirically that it is a better predictor of short term prices than the mid-price or the weighted mid-price.

Get the code and sample data on Github: https://github.com/sstoikov/microprice

Watch the video intro on YouTube: https://www.youtube.com/watch?v=0ZHypIAxYNo

Keywords: Market Microstructure, High-Frequency Trading, Micro-Price, Short Term Price Prediction, Limit Order Book, Liquidity, Trading Volume, Equity Markets, Electronic Markets, High Frequency Data, Financial Engineering

JEL Classification: G12, C44, C51, C32