Fade or follow after a tick burst: conditioning on the spread
Posted: Sat Oct 31, 2026 7:06 pm
A burst of ticks signals activity, but the direction of the next move depends on the state of the market. The spread during and after the burst is a useful discriminator.
If the spread stays tight during the burst, liquidity providers are comfortable, and the move may reflect real flow that can continue. If the spread widens sharply, providers are cautious, and the price move may overshoot and revert.
Test by splitting bursts into groups by spread behavior: tight, moderate, wide. Compute the subsequent return over several horizons for each group. The groups often show different signs.
Combine with the direction of the burst relative to a short-term trend or a nearby level.
The resulting rules are simple, such as following bursts with a tight spread and fading those with a spread above a threshold. Each should be validated out of sample and with costs.
The principle is that market state variables modulate the meaning of the same price pattern. A single rule for all conditions is usually worse than conditional ones.
How does the post-burst return differ between bursts with tight and wide spreads?
If the spread stays tight during the burst, liquidity providers are comfortable, and the move may reflect real flow that can continue. If the spread widens sharply, providers are cautious, and the price move may overshoot and revert.
Test by splitting bursts into groups by spread behavior: tight, moderate, wide. Compute the subsequent return over several horizons for each group. The groups often show different signs.
Combine with the direction of the burst relative to a short-term trend or a nearby level.
The resulting rules are simple, such as following bursts with a tight spread and fading those with a spread above a threshold. Each should be validated out of sample and with costs.
The principle is that market state variables modulate the meaning of the same price pattern. A single rule for all conditions is usually worse than conditional ones.
How does the post-burst return differ between bursts with tight and wide spreads?