Ever wonder how order flow works and why it seems to repeat, why buy orders often follow other buys, and sell orders spark more selling?
Research from 2014 shows that the answer lies less in herd mentality and more in strategic behaviour, such as order splitting.
When large investors break big trades into smaller ones, it creates a ripple effect that keeps order flow moving in the same direction for hours or days.
What Is Equity Order Flow?
The order flow in equities refers to the sequence of market buy and sell orders, meaning that the order flow exists only when traders actively participate in the auctions. Here, limit orders are not taken into account.
Each trade contributes to the “flow” of the market, either adding buying or selling pressure.
These trading flows have shown persistence, indicating that buy orders are statistically likely to be followed by additional buys, while sell orders tend to be followed by more sells. This persistence can continue for thousands of trades and span several trading days.
The Research: Why Is Order Flow So Persistent?
At first glance, persistent order flow seems irrational. In general, we might expect the market to find balance as prices adjust to new levels quickly, but that doesn’t always happen.
This is a phenomenon that economists have long debated, proposing two main explanations:
- Herding behaviour, where traders copy one another’s actions.
- Order splitting, where single investors break large trades into smaller chunks.
For a long time, mass behaviour has been a central topic in trading psychology. Still, research using London Stock Exchange data (Tóth, Palit, Lillo & Farmer, 2014) shows that one of these dominates: order splitting.
Order Splitting: The Strategic Side of Persistence
Large institutional investors rarely execute massive trades in one go. Doing so would move the market against them. To minimise that, they split large orders into smaller, incremental trades over time, often using algorithms to disguise their intent.
This process naturally creates autocorrelation in the order flow:
- A large buy order split across hours leads to repeated buy signals
- A large sell order leads to consecutive sell signals
This behaviour doesn’t mean that everyone is following the same trend; it simply shows that a large trader is quietly executing a strategy in the market.
According to the research, this short-term persistence in order flow most often comes from the same institution.
Herding Behaviour: The Human Factor
Although order splitting dominates most of the time, herding still plays a role over longer time horizons.
Herding occurs when investors or traders act in a similar way, and this happens for several reasons:
- They interpret public news in the same way.
- They infer information from others’ trades.
- They want to avoid standing out or missing a trend.
However, studies show that herding contributes far less to short-term flow persistence. It’s more visible in fund-level data (e.g., mutual funds’ quarterly holdings) rather than in high-frequency trading.
The Market Microstructure Behind It All
Equity order flow consistently links to market microstructure, which influences how traders place, match, and execute their trades.
Key factors include:
- Algorithmic trading: Automated systems break orders strategically.
- Brokerage concentration: A few major brokers handle most trades, creating consistent order patterns.
- Liquidity clustering: Traders time entries when liquidity is high, reinforcing existing trends.
These structures have remained stable over the past decade.
When buy orders cluster together, prices move gradually, absorbing information little by little. This slow adjustment is what traders recognise as market impact: the way each order nudges prices in its direction.
Liquidity providers, market makers, and algorithms quickly detect these order patterns. When persistent buying appears, they raise offers; when persistent selling dominates, they lower bids.
Turning Order Flow data into an Edge
For traders, this persistence carries powerful lessons:
- Price follows pressure. Sustained buying or selling pressure often precedes short-term price continuation. Reading order flow helps you anticipate these moves before they appear on charts.
- Liquidity is reactive, not static. The market’s depth changes as participants respond to flow. Recognising when liquidity retreats or builds can help you position yourself ahead of major shifts.
- Not all volume is equal. A single large trade may move the market less than a series of smaller, consistent ones. Persistent flow reveals where “smart money” is active.
- Market impact is temporary but informative. Even if prices normalise after large trades, the path they take reflects true supply-demand imbalances.
Want to access the full research? Click here to read the complete study.
Conclusion
The persistence we see in order flow is driven by large players splitting their orders over time. That’s what creates short-term trends and impacts price. This research confirms it.
As we’ve said before, understanding order flow gives traders an edge. It allows you to position yourself with the smart money instead of against it.
By watching how liquidity reacts, spotting when momentum slows, and adapting your entries based on real data, you move from guessing to trading with intent.
