The best bid is 10.00 for 100 lots and the best ask is 10.02 for 400 lots. Compute the size-weighted micro-price and say what it predicts about the next move in the mid.

The best bid is 10.00 for 100 lots and the best ask is 10.02 for 400 lots. Compute the size-weighted micro-price and say what it predicts about the next move in the mid.

Approach: Weight each side's price by the size resting on the opposite side, since the smaller side is the one that gives way first, then compare the result with the plain mid.

10.004. The micro-price is (P_bid * Q_ask + P_ask * Q_bid)/(Q_bid + Q_ask) = (10.00 * 400 + 10.02 * 100)/500 = 5002/500 = 10.004, which sits 0.6 cents below the 10.01 mid price. The weighting uses the opposite queue size because the small side is consumed first: with 100 lots bid against 400 offered, an order book imbalance of 100/500 = 0.2 says the next trade is four times more likely to be a sale into the bid. A maker who quotes symmetrically around 10.01 is systematically buying above the price the book implies, so the quote should be centred on 10.004.

Follow-up: How does the micro-price change when there are 5,000 lots hidden one tick behind the bid?

Key concepts: micro-price, order book imbalance, queue size, mid price.