This indicator may measure something about retail investors' sentiment but it is unlikely to capture much about institutional trades. Those often use "iceberg" orders, where a very small posted limit order (tip of the iceberg) conceals a much larger true order size. Perhaps you may find this link useful: http://www.dgf2008.de/content/paper/Frey_Sandas_Iceberg_Sept7th08.pdf
Another interesting way to analyze limit order book, while combining the price and the quote size, is to view each bid and ask quote as call and put: When an investor places an ask limit order, he effectively grants other investors the right, but not the obligation to buy his stock at the limit price. This is similar to writng a call. Same logic can apply with respect to bids and puts. The bid-ask spread represent twice the premium that the investor ( or market maker) expects to earn in return for granting such right. Within that framework, the time to expiration t =(quote size / average daily volume ). Then, black-scholes type formula can be inverted to get implied volatility of the bid and ask quotes. Change in average implied volatility may be predictive of the stock direction in the same way VIX index is. ________________________________ From: Eugene Kononov <[email protected]> To: [email protected] Sent: Sat, November 6, 2010 5:01:32 PM Subject: Re: [JBookTrader] meaning of depth balance Market depth balance is the number which quantifies the relationship between the size of all bids and the size of all offers in the exchange's limit order book. For every snapshot every 1 second, JBookTrader sums up all bid sizes, sums up all offer sizes, and calculates the balance as balance = 100 * (cumulativeBidSize - cumulativeAskSize) / (cumulativeBidSize + cumulativeAskSize) So, by design, the balance varies from -100 to +100. It's negative when the size of all offers exceeds the size of all bids, and positive otherwise. -- You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en. -- You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en.
