Guide · Track 07
Market microstructure
Order books and queues, the bid–ask spread and what it pays for, informed trading from Glosten–Milgrom to Kyle, price impact and execution, inventory risk, Avellaneda–Stoikov quoting and market-making P&L.
11 lessons, in order
Each builds on the one before
- Market makers and liquidityWho provides liquidity, how bid and ask quotes work, the spread as the price of immediacy, makers and takers, and the risks a market maker carries.Market MakingUp next
- The limit order bookLimit and market orders, price–time priority, depth, how a market order walks the book, and slippage measured against the mid price.Order Book
- Queue position and fill probabilityFirst-in, first-out queues at a price, how long a limit order waits, the chance it fills, why moving it costs priority, and why fills come before price moves.Order Book
- Adverse selection and informed tradingWhy trading with someone who knows more costs money, markouts as the measure of that cost, toxic flow, and how informed traders change the best spread.Market Making
- The Glosten–Milgrom modelA Bayesian market maker facing informed and noise traders: quotes as conditional expectations, a spread from the informed share, and learning trade by trade.Glosten–Milgrom
- Measuring and decomposing the bid–ask spreadQuoted, effective and realised spreads, the Roll estimator from trade prices alone, and the split into adverse selection and the rest.Spread Estimation
- Informed trading and Kyle's lambdaAn insider hiding among noise traders, a market maker who prices from total order flow, the price-impact coefficient λ, and why the insider trades gradually.Kyle Model
- Price impact and optimal executionTemporary and permanent impact, the square-root rule of thumb, splitting a large order over time, and the Almgren–Chriss trade-off between cost and risk.Order Book
- Inventory risk and quote skewingHow a maker's position turns price moves into P&L, why that risk grows with position and time, and how shading both quotes pulls inventory back to zero.Market Making
- Optimal quoting: the Avellaneda–Stoikov modelExponential utility, fills that fall off with distance from the mid, the reservation price, the optimal spread, and how risk aversion and time shape quotes.Avellaneda–Stoikov
- Market making profit and loss attributionSplitting a maker's P&L into spread capture, adverse selection, inventory and fees, with markout curves, fill ratios and the numbers a desk watches.Market Making
Check yourself
Questions from the lessons of this series. Open a lesson's group whenever you want to test yourself.