The Quiet Signal of Market Moves

Order-flow entropy demonstrably predicts the magnitude of five-minute returns-declining from 8.14 to 3.75 basis points across quintiles-thereby forecasting volatility, though it provides no indication of return direction, as evidenced by an analysis of 828,907 second-resolution observations over 36 trading days, significantly differing from the unconditional mean of 5.29 basis points.

New research reveals how the complexity of trading activity can foreshadow the size of price swings, even without indicating which way they’ll go.