In this video we compare the clock time evolution and the volume time evolution of the microprice of a 10-year Treasury futures.

In the first part of the video, we consider the evolution of the microprice (top-left plot) and the corresponding traded volume (bottom-left plot) as a function of clock time, i.e. the usual time as measured by a clock.

However, in high frequency trading, practitioners do not rely on clock time. Instead, they rely on volume time, which stretches time based on the volume traded in the market.
More precisely, the volume time corresponding to a given clock time is the total number of contracts exchanged up to that clock time. Accordingly, volume time elapses faster when more contracts are traded. Vice versa, if the market is closed, then no trading occurs and volume time stands still.

In the second part of the video we visualize the transformation of microprice from a function of clock time (top-left plot) to a function of volume time (top-right plot). Observe how the volume time microprice is smoother than the clock time microprice, and thus it is more suitable to be analyzed econometrically.

This and other videos for Advanced Risk and Portfolio Management at the ARPM Bootcamp!