How Polymarket Order Book Imbalance Can Signal Short-Term Price Moves

Polymarket's Central Limit Order Book (CLOB) exposes bid and ask data for outcome tokens, allowing traders to measure order book imbalance as a quantitative signal. A simple imbalance statistic compares total bid volume to ask volume on a scale of -1 to +1, but the metric can be refined by calculating it across multiple price-level depths. Researcher Nagi argues that imbalance should be treated as a state variable rather than a direct price predictor, since displayed orders may vanish before execution and do not reveal trader intent. The more precise research question is whether changes in imbalance predict short-horizon midpoint returns after controlling for price, spread, and market depth. This framework turns order book data into a testable, quantitative input for algorithmic trading strategies on prediction markets.