Assume it is possible to predict both ask and bid liquidity several minutes into the future. What sort of strategies or indicators would you use to show how this influences price? How would you turn this into profit?
One more time, trying to bring this to the top. I'll rephrase. I've heard many say volume leads price. If liquidity, and thus volume can be predicted for each side of the market, could it be used as a price direction indicator?
A very simple representation is a 2nd order polynomial which captures the slope of the price impact of a marker order, and the curve (concave,linear,convex). p(t,q(i)) = r(t) + a*(q(i)^b) where q(i) is the size of the market order in shares, for q(i) i 1 to 200,000 in increments of 100 shares for example. p(t,q(i)) = marginal price in terms of percentage diff from midpoint based on market order of size q(i). p(t-1) a and b are the parameters to be estimated from the order book and specialist quotes and forecasted into the future. m(t) is the is the midpoint price at time t Higher order polynomials will more accurately capture the detailed shape of the book, but could be more difficult to interpret.