Market Microstructure
How orders become trades
Market microstructure studies the mechanics of how orders are processed and how prices are formed.
The order book: - Bids: Orders to buy at specific prices - Asks: Orders to sell at specific prices - Spread: Gap between best bid and best ask
Order types: - Market orders: Execute immediately, "take" liquidity - Limit orders: Wait at specific price, "provide" liquidity - Iceberg orders: Show only fraction of full size
Key concepts: - Market makers: Profit from spread, provide liquidity - Dark pools: Hide institutional orders from public - Slippage: Execution at different price than requested - Depth of market: Shows pending orders at each level
Pro tip: Understanding microstructure explains WHY price does what it does at certain levels — it's all about order flow.
Common mistake: Thinking visible order book shows all pending orders. Better: Dark pools and iceberg orders hide significant institutional volume.
Key takeaways
- Order book shows pending buy/sell orders
- Market orders take liquidity, limits provide it
- Iceberg orders hide institutional size
- Market makers profit from the spread
Quiz
- An iceberg order is designed to: Answer: Hide the true order size. Iceberg orders display only a fraction of the full order size to avoid showing institutional intent.
Educational content, not financial advice.