Empirical Analysis of Order Book Dynamics and Trade Impact in Futures Markets

Abstract

In this paper, we will first examine how order book imbalances in the futures market predict short-term price changes. We will then examine other meaningful trends in the patterns of the trade executions, such as how the time of day affects trade traffic. Lastly, we will examine a model developed for market impact of trades in stocks and attempt to extend it to model impact in the futures market. We find that although market impact can be modeled reasonably well, predicted short-term price changes are not as accurate as we would hope. This line of research has many applications in portfolio management and trading, influencing the approach to the mean-variance optimal execution problem. Traders may choose to adapt the execution rate according to order book imbalances and anticipated market impact of trades.