Order flow
Family VII · Market & styles
Not to be confused with market depth, liquidity, price action.
Order flow is the record of orders as they arrive at a market: market orders, limit orders, cancellations and amendments, together with the size and price at which each is submitted. It describes the pressure of buying and selling interest before and during execution, not merely the trades that result. Traders who study order flow look at the balance between aggressive orders that cross the spread and passive orders that rest in the book.
What order flow consists of
Order flow covers several distinct events, all of which can move a price:
- Market orders that execute immediately against resting liquidity.
- Limit orders that add liquidity to the book at a specified price.
- Cancellations and amendments that remove or change resting interest.
- Hidden or iceberg orders, whose full size is not displayed.
The mix of these events, and the speed at which they occur, forms the flow. A market can print many trades while order flow is one-sided, if one participant keeps replenishing the same side of the book.
Worked example
Suppose a futures contract is quoted 100.00 bid / 100.01 ask. Over one minute the following orders arrive:
The positive net figure indicates that aggressive buying outweighed aggressive selling during the interval, even though the quoted price may have moved only one tick.
How it is observed
Order flow is visible through data feeds that show individual orders and trades, such as a Level 2 display or a time-and-sales tape. The detail available varies by venue and by data package: some markets publish full order-by-order data, while others publish only aggregated best bids and offers. Consolidated tape data may lag or omit off-exchange activity. For these reasons, the same instrument can present different order flow pictures depending on the feed used.
Limits of order flow analysis
Displayed order flow is incomplete. Hidden orders, dark pools and internalised retail flow do not appear in public books, and large participants may place and cancel orders to obscure intent. Order flow therefore describes what is visible at a given venue, not the total demand and supply in a market. It is also historical by the time it is read: the orders shown have already been submitted.
Often confused with
- market depth
- Market depth is the measure of the volume of buy and sell orders available at each price level in an order book, indicating the market's ability to absorb large orders without significant price movement.
- liquidity
- Liquidity is the ease and speed with which an asset can be bought or sold in a market without materially affecting its price, typically reflected in tight bid-ask spreads and deep order books.
- price action
- Price action is the study of a security's price movements as shown by its chart, without relying on indicators or derived statistics, to identify patterns and levels that reflect buying and selling pressure.