Probability of Informed Trading (PIN)
Market Microstructure glossary · Adverse Selection & Information Asymmetry
Definition
An estimate of the fraction of trades that come from informed traders, derived from imbalances in buy- and sell-initiated order flow over time. Formally, in the Easley–Kiefer–O'Hara–Paperman (1996) model, PIN = αμ / (αμ + varepsilon_b + varepsilon_s), where α is the probability of an information event, μ the informed-trade arrival rate, and varepsilon_b, varepsilon_s the uninformed buy and sell arrival rates.
Probability of Informed Trading (PIN) in plain English
Some traders buy or sell because they secretly KNOW something (say, news that a stock is about to jump); others are just trading for random everyday reasons. PIN tries to estimate what fraction of trades come from those 'in-the-know' traders, by noticing lopsided days where way more people are buying than selling (or vice versa) — a sign someone's acting on real information. In the formula PIN = αμ / (αμ + varepsilon_b + varepsilon_s), the top part αμ is roughly 'how often informed trades happen,' and the bottom adds in all the ordinary buy and sell trades (varepsilon_b and varepsilon_s), so PIN is just the informed slice divided by everything. A higher PIN means the market is riskier for the person quoting prices, because more of their trading partners might know something they don't.
Also called: PIN
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