  We propose a price impact model where changes in prices are purely driven by
the order flow in the market. The stochastic price impact of market orders and
the arrival rates of limit and market orders are functions of the market
liquidity process which reflects the balance of the demand and supply of
liquidity. Limit and market orders mutually excite each other so that liquidity
is mean reverting. We use the theory of Meyer-$\sigma$-fields to introduce a
short-term signal process from which a trader learns about imminent changes in
order flow. In this setting, we examine an optimal execution problem and derive
the Hamilton--Jacobi--Bellman (HJB) equation for the value function. The HJB
equation is solved numerically and we illustrate how the trader uses the signal
to enhance the performance of execution problems and to execute speculative
strategies.
