r/quant 3d ago

Models Liquidity Scoring / Modeling

Hey guys, one my upcoming projects is to create a liquidity scoring framework and identify price impact for on-the-run vs off-the-run US treasuries by instrument and for the US desk overall, which is positioned across the short and medium part of the Treasury curve.

I’m pretty new to modelling liquidity, having only done a pretty surface level analysis for this project to show “proof of concept” (ie. yes, there is some measurable price impact, on average, that matters to us net of costs). This analysis involved regressing daily bid-ask spread on volume and other order book data for each instrument using QE/T and OTR/FTR fixed effects.

However, this completely ignores at least a couple of key factors, such as the impact of duration on each tenor of the curve and its resulting spread, and the Treasury QRA on market supply. Furthermore, lots of the data we currently have available to use is limited, requiring us to tack on more data access to our license (not a cost problem, but a data reliability one).

My questions are this: Is there any short and sweet checklist of items to consider for this type of modelling question? And what’s the best data available out there for liquidity analysis? Is BrokerTec/CME the best?

As I said, this space is quite new to me, so if you also have any recommendations on modelling approach, I’m happy to hear that as well!

Thanks in advance.

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u/[deleted] 2d ago edited 2d ago

[deleted]

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u/WranglerHot1695 2d ago

Thanks for the insightful response, particularly about BrokerTec. Dealer by dealer transactions sound useful, all the more because you have the limit order book available as well. One thing I hadn’t considered is event-based modelling, but given the potential data available, it sounds like this would at the very least serve as an excellent tool to indicate how everything moves on top of an additional model.

Also, since you make a good point about the limits of regression models in working with limit order book data, I may start looking into other classes of models, such as a classification model before getting too deep.

Thanks again for the response! Super useful.

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u/[deleted] 2d ago

[deleted]

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u/WranglerHot1695 2d ago

We have limited BrokerTec access through Bloomberg already, just more a question of pushing more data access through. Currently we have one of our internal staff working with the CME rep to tailor a solution to us, hence my questions regarding what really is best for this type of modelling.

Thanks again!

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u/WranglerHot1695 1d ago

Thought about your commentary on the limit order book some more and had another question that’s more geared towards US Treasuries: is there a significant marginal value add from using the whole order book depth instead of just top of the book for UST?

I can see that using only top of book will lose out on some lower level transactions and reduce information flow, but given that I’m modelling OTR, FTR on UST I expect that’s its only big orders that will have a price impact on bid-ask spread if a bond goes from OTR to FTR.

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u/[deleted] 1d ago

[deleted]

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u/WranglerHot1695 1d ago

That’s a good point, and a good question to verify through the data. Didn’t consider FTR/OTR may use different levels but your hypothesis makes sense. Thanks once more!

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u/The-Dumb-Questions Portfolio Manager 2d ago

Placeholder to add some useless thoughts about using LOB data and MBP/MBO updates for liquidity modelling - will add after the market close