Polymarket Order Book Imbalance: Reading Market Depth
Learn how Polymarket order book imbalance measures bid and ask pressure, when it contains useful information, and how to test it quantitatively. What Order Book Imbalance Reveals About Polymarket Markets A Polymarket price tells you where the market is trading. The order book tells you something different: how much liquidity is positioned around that price . That distinction matters. Two markets…
Polymarket order book imbalance measures the differences between bid and ask pressure in the market. This imbalance provides valuable information about the distribution of liquidity around the current price, which is different from the price itself. Two markets trading at the same price can have very different order book structures depending on the depth and distribution of bids and asks.
It is crucial to consider multiple levels of depth when calculating order book imbalance, as it can reveal broader liquidity positioning beyond just the immediate best bid and ask. Using raw imbalance as a directional prediction is not sufficient, as it can be interpreted in various ways. Instead, the focus should be on how changes in imbalance affect future price movements, controlling for other factors like price, spread, and market depth.
To properly analyze the relationship between order book imbalance and price changes, researchers should examine the change in imbalance over time (ΔOI_t) and its impact on future midpoint returns. This approach allows for a more nuanced understanding of how order book imbalance can signal potential short-horizon price movements.
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