· Market Structure · 1 min read
Decoding Market Microstructure
Understanding the hidden liquidity dynamics and order flow interactions that drive price discovery in electronic markets.
The Fabric of the Market
Market Microstructure is the study of the exchange mechanisms and the behavior of market participants. Understanding how orders are matched and how liquidity is provided is crucial for minimizing execution costs (slippage).
Order Book Dynamics
At any given millisecond, the Limit Order Book (LOB) tells a story of supply and demand.
- Depth: How much volume is available at each price level?
- Imbalance: Is there more pressure on the bid or the ask?
- Flow: Are aggressive orders consuming liquidity?
By analyzing these dynamics, we can predict short-term price movements and optimize execution strategies.
