BV–VPIN: Measuring the Impact of Order Flow Toxicity and Liquidity on International Equity Markets

Abstract

Order flow toxicity is a measure of a trader's exposure to the risk that counter-parties possess private information or other informational advantages. High levels of order flow toxicity can culminate in market makers providing liquidity at a loss or in suboptimal execution of trades. From a regulatory perspective, high levels of toxicity can be harmful to overall market liquidity and precede precipitous drops in asset prices. Bulk Volume VPIN (BV-VPIN) is one way of measuring the "toxicity" component of order flow that has been successfully applied in High Frequency Trading (HFT) environments. We apply the BV-VPIN to daily data for a range of international indices to extend previous analysis of its properties. We find that a rise in BV-VPIN effectively foreshadows high-levels of volatility in the equities indices of several countries. If a BV-VPIN futures contract exists, we show that it would exhibit safe haven characteristics during market downturns. In particular, a simple active portfolio management strategy that times investments in equities (risk-free asset) when BV-VPIN levels are low (high) outperforms a buy-and-hold strategy. Thus, we find support for the application of BV-VPIN in international equities.