Order Flow Imbalance (OFI) measures the net directional pressure at the top of the limit order book — the difference between arriving buy-side and sell-side activity at the best quotes, normalized to account for changes in quoted quantities.
Cont, Kukanov, and Stoikov (2014) showed that OFI is a highly significant predictor of short-term price changes (at the one-minute horizon) for large-cap equities, outperforming simpler signed trade-count measures and capturing the informational content of order flow more precisely.
OFI construction
OFI at each market event is a function of changes to the best bid and ask quantities:
- Increases in the best bid quantity or decreases in the best ask quantity represent buying pressure
- The measure aggregates these order book updates over a fixed time or event window to produce a flow-pressure indicator
OFI is a high-frequency alpha signal used in statistical arbitrage strategies. Its predictive power decays within minutes (fast decay), but is highly statistically significant at its peak horizon — unlike longer-horizon fundamental signals. This makes it viable only at very low transaction costs.