Market mechanics basics
The vocabulary behind the problems, in short definitions. Follow the links for the full story.
- Order book
- The list of resting buy and sell limit orders at each price, with their sizes. It shows who is willing to trade, at what price, and how much. Read more
- Bid and ask
- The bid is the highest price a buyer will currently pay. The ask (or offer) is the lowest price a seller will currently accept. Bid 100.0 and ask 100.1 means you can sell now at 100.0 or buy now at 100.1. Read more
- Spread
- Ask minus bid. It is the cost of buying and immediately selling again, and a tighter spread usually means a more liquid market. With bid 100.0 and ask 100.1 the spread is 0.1.
- Mid price
- The average of bid and ask, (100.0 + 100.1) / 2 = 100.05. A handy reference price, but you cannot trade at it.
- Market order and limit order
- A market order trades immediately at the best available prices. A limit order sets the worst price you accept and may wait in the book until someone trades with it. Read more
- Depth
- How much size is available near the best prices. A thin book moves a lot when someone trades a large amount; a deep book absorbs it.
- Slippage
- The gap between the price you expected (often the mid when you decided to trade) and the average price you actually got. Large orders slip because they use up the best level and move on to worse ones. Read more
- Tick size
- The smallest allowed price step. It also sets the smallest possible spread: if the tick is 0.1, the spread cannot be less than 0.1. Read more
- Queue priority
- In a price-time priority market, orders at the same price fill in the order they arrived. Being early in the queue matters, and cancelling means going to the back.
- Market maker
- A participant who quotes both a bid and an ask, aiming to earn the spread while managing the risk of holding inventory. Read more
- Adverse selection
- The risk that the person trading with you knows more than you do. It is a main reason market makers widen spreads after a trade moves against them. Read more
- Microprice
- A size-weighted mid: (bid × ask size + ask × bid size) / (bid size + ask size). With more size on the bid, the microprice sits closer to the ask, hinting the next move may be up.
- Market microstructure
- The study of how trading rules, order books and participants shape prices and costs. This whole track lives here. Read more