MECE Components of Market Activity
This document outlines a MECE classification of market phenomena — everything that either is trading, could trade, or exists as open exposure.
At the highest level, all market behavior falls into two categories:
- Realized trading activity — what has already occurred (executed volume).
- Potential trading activity — what could occur (positions, resting orders, latent orders).
There is nothing outside this set.
Every observable or implied measure of market behavior can be mapped into one of these categories,
for both perpetual and spot markets.
1. Realized Trading Activity
Definition: Executed trades within a given time interval.
Metric: Volume (flow variable).
Nature:
- Aggregated over time (1m, 1h, 1d, etc.)
- Represents the rate of exchange between participants.
- Can span across markets (e.g., perp ↔ spot arbitrage volume).
Interpretation:
Trading that has actually happened.
2. Potential Trading Activity
Potential trading activity refers to the capacity or readiness for trades to occur.
It has three subcategories, forming a continuum of realization.
| Subcategory | Description | State Type | Observability |
|---|---|---|---|
| Positions (Open Interest) | Currently held exposure | Instantaneous state | Observable |
| Order Book | Resting bids and asks waiting for execution | Instantaneous state | Observable |
| Shadow Order Book | Conditional or algorithmic intent to trade | Latent state | Indirect |
Interpretation:
- Positions represent exposure already committed.
- Order book represents immediate willingness to transact.
- Shadow order book represents deferred or conditional willingness to transact.
Together, these define the entire space of potential activity.
2.1 Positions (Open Interest)
Definition:
Total number of active, unsettled positions (contracts or units) at a given instant.
Nature:
A state variable — a snapshot in time.
Interpretation:
Represents existing exposure or commitments currently held in the market.
Increases when new positions open, decreases when positions close.
2.2 Order Book
Definition:
Set of active limit orders resting on the exchange — all visible bids and asks.
Nature:
A state variable reflecting current standing intentions to trade.
Interpretation:
Shows available liquidity at specific prices.
Unlike OI, orders here may or may not execute.
2.3 Shadow Order Book
Definition:
Liquidity that is not currently visible but could appear when certain conditions are met
(e.g., algorithmic triggers, threshold-based execution, time or volatility gating).
Nature:
A latent state — conditional intent to trade.
Observability:
Indirect. Cannot be measured directly, but reasonable bounds can often be inferred
from related information such as:
- Reaction speed and depth replenishment after large trades.
- Historical participation patterns at given price levels.
- Known algorithmic behavior or disclosed execution frameworks.
- Implied liquidity derived from volatility and slippage response.
Interpretation:
Represents dry powder — the portion of potential liquidity waiting for activation.
While subjective, it exists within bounded estimates (a plausible lower and upper limit),
making it analytically meaningful even if not precisely quantifiable.
3. Cross-Domain Flows
Flows can traverse:
- Asset boundaries: spot ↔ perpetual (basis or arbitrage flows).
- Category boundaries: latent → order book, order book → executed volume, volume → OI.
- Cross-market dynamics: hedging flows, funding-linked rotations, liquidity migration.
These transitions describe how potential becomes realized or how exposure shifts form.
4. Summary Table
| Category | Subcomponent | Nature | Observable | Crosses Markets | Represents |
|---|---|---|---|---|---|
| Realized | Volume | Flow | Yes | Yes | What traded |
| Potential | Positions (OI) | State | Yes | Sometimes | What exists |
| Order Book | State | Yes | Exchange-specific | What’s offered | |
| Shadow Order Book | Latent State | Indirect | Yes | What could appear |
5. Completeness of the Framework
Together, these components describe a bounded and complete system of market activity:
- Realized activity — what has already occurred (executed volume).
- Visible potential activity — what is currently offered or held (order book, open interest).
- Inferred potential activity — what could emerge under certain conditions (shadow order book).
The first category is objective and directly measurable.
The second is transparent but conditional — visible at a given moment, yet subject to change.
The third is subjective but bounded — inferred through behavioral and structural evidence,
with reasonable lower and upper limits based on how markets historically respond.
Together, they form a mutually exclusive, collectively exhaustive map of trading behavior and potential.
Every form of liquidity, risk, or exposure in both spot and perpetual markets exists within this structure.