Recency Effect in Order Flow

The Recency Effect in Order Flow describes the tendency of market participants to react most strongly to the latest orders or trades executed on an exchange. In high-frequency environments, traders often perceive the most recent buy or sell pressure as the most indicative of future direction.

This creates a feedback loop where traders chase the latest momentum, potentially ignoring underlying liquidity voids or hidden limit orders. This behavior can lead to exaggerated price swings as market participants cluster their actions around recent, highly visible trades.

It is a fundamental component of how short-term sentiment propagates through an order book.