Expected Mid Change From Poisson Order Flow

Expectation · Medium · Free problem
In a 1-second interval, buy market orders arrive as $N_b \sim \text{Poisson}(6)$ and sell market orders arrive as $N_s \sim \text{Poisson}(5)$, independently. Each buy order independently moves the mid price up by $+1$ tick with probability $0.3$ (otherwise no impact). Each sell order independently moves the mid price down by $-1$ tick with probability $0.25$ (otherwise no impact). Impacts are independent across all orders and sides. Let $M$ be the total mid price change (the sum of all individual impacts). 1. Compute $E[M]$ and $\text{Var}(M)$. 2. Using a normal approximation, estimate $P(M \ge 2)$. State the mean and variance you plug in.

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