This article develops and implements a new methodology for identifying intraday information regimes in limit order books. Based on Lehmann (2008), in an information regime all the information is trade related and arrives via order ?ow and, the fundamental value that underlines the prices does not change, it is simply translated by the size of the executed market order and the back?lling adjustment. During an information regime the best quotes and the underlying values follow a path de?ned by the limit order book. A change of information regime within a given day is shown to alter the provision of liquidity to the market with consequences for asset prices, trading behavior, and optimal trading strategies. By applying wavelet theory we have developed a methodology that allowed us to clearly identify information regimes. Our results show that information regimes have an impact on price formation and price discovery, including dynamic issues such as the process by which prices come to capture information over time. The discovery and ideate?cation of information regimes essentially uncovers the mechanism by which latent demands are translated into realized prices and volumes. These results empirically support Lehmann’s theoretical model.
