Market microstructure is the study of how buyers and sellers interact, how prices form, and how orders become trades. For engineers, this is where system behavior directly changes financial outcomes.

Core Concepts

  • Order types: market, limit, stop, iceberg.
  • Order book: bid/ask levels with price-time priority.
  • Spread: ask minus bid; a key transaction cost.
  • Liquidity: how much can be traded without moving price.
  • Slippage: difference between expected and executed price.

Why Engineers Should Care

  • Matching-engine latency changes fill quality.
  • Queue position affects execution probability.
  • Throttling and retries can create accidental duplicate orders.
  • Timestamp precision is critical for post-trade analysis.

Practical System Design Notes

  • Use immutable execution events.
  • Keep clock synchronization explicit (NTP/PTP strategy).
  • Separate market-data ingestion from order-routing paths.
  • Build replay tooling for execution incident investigation.

References

Best Books to Read

  • Trading and Exchanges — Larry Harris
  • Algorithmic Trading and DMA — Barry Johnson
  • Market Microstructure Theory — Maureen O’Hara

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