Market Microstructure

Question 1

What is market microstructure?

Answer 1

The study of how trading actually happens, including order books, matching, spreads, and liquidity.

Question 2

What is an order book?

Answer 2

A live list of buy and sell orders at different prices for an instrument.

Question 3

What is the bid?

Answer 3

The highest price a buyer is willing to pay.

Question 4

What is the ask or offer?

Answer 4

The lowest price a seller is willing to accept.

Question 5

What is the bid-ask spread?

Answer 5

The difference between the best bid and the best ask.

Question 6

Why does spread matter?

Answer 6

It is a key measure of transaction cost and liquidity.

Question 7

What does a tight spread usually indicate?

Answer 7

Better liquidity and lower execution cost.

Question 8

What does a wide spread usually indicate?

Answer 8

Lower liquidity or higher uncertainty.

Question 9

What is depth in an order book?

Answer 9

The amount of quantity available at different price levels.

Question 10

What is slippage?

Answer 10

The difference between expected execution price and actual execution price.

Question 11

What causes slippage?

Answer 11

Market movement, low liquidity, or large order size relative to available depth.

Question 12

What is market impact?

Answer 12

The price movement caused by executing an order.

Question 13

What is a market order?

Answer 13

An order to trade immediately at the best available price.

Question 14

What is a limit order?

Answer 14

An order to trade only at a specified price or better.

Question 15

What is a stop order?

Answer 15

An order that becomes active once a trigger price is reached.

Question 16

What is time in force?

Answer 16

The duration or conditions under which an order remains active.

Question 17

What is IOC?

Answer 17

Immediate-or-cancel; execute immediately what you can, cancel the rest.

Question 18

What is FOK?

Answer 18

Fill-or-kill; either fill the whole order immediately or cancel it entirely.

Question 19

What is VWAP?

Answer 19

Volume-weighted average price.

Question 20

Why is VWAP used?

Answer 20

As an execution benchmark or target for algorithmic trading.

Question 21

What is TWAP?

Answer 21

Time-weighted average price.

Question 22

What is an execution algorithm?

Answer 22

Software logic used to slice and route orders to achieve execution goals.

Question 23

What is smart order routing?

Answer 23

Routing an order across venues to seek the best execution outcome.

Question 24

What is best execution?

Answer 24

The obligation or goal of achieving the most favorable overall execution result for a client or strategy.

Question 25

What is adverse selection?

Answer 25

When a liquidity provider is more likely to trade against better-informed flow.

Question 26

What is latency in market terms?

Answer 26

The delay between a market event and system response.

Question 27

Why does latency matter in market data systems?

Answer 27

It affects timeliness of signals, execution quality, and consistency across systems.

Question 28

What is tick data?

Answer 28

High-frequency event-level data such as trades and quote updates.

Question 29

What is bar data?

Answer 29

Aggregated market data over intervals such as 1 minute or 1 day.

Question 30

What is a strong one-line explanation of microstructure?

Answer 30

Microstructure is about how prices are formed in practice through order flow, spreads, depth, and execution behavior.