Market Microstructure

The Best Bid and Offer (BBO) represents the highest current buy price and lowest current sell price for a security on a single exchange, forming the tightest available spread at that venue.

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask), representing a fundamental transaction cost and measure of liquidity.

Circuit breakers are regulatory mechanisms that temporarily halt trading when prices move by a specified percentage within a given timeframe, designed to prevent panic selling and allow orderly market function.

Continuous trading is a market mechanism where orders are matched immediately and continuously as they arrive throughout the trading session, providing instant execution but with varying prices for each transaction.

Dark pools are private trading venues where institutional investors can execute large block trades anonymously, away from public exchanges, to minimize market impact and information leakage.

A Designated Market Maker (DMM) is a firm assigned by the NYSE to maintain fair and orderly markets in specific listed securities, running opening and closing auctions and providing liquidity during periods of stress.

Lot size refers to the standardized quantity of shares or contracts in a single trading unit, with a round lot traditionally being 100 shares in stock markets, though fractional share trading has made this less relevant for retail investors.

The maker-taker fee model charges different fees based on whether an order adds liquidity (maker, typically receives a rebate) or removes liquidity (taker, pays a fee), incentivizing limit order placement.

Market depth measures the volume of buy and sell orders at various price levels in the order book, indicating how much trading can occur without significantly moving the price.

Market impact is the effect that a trade has on the prevailing market price, where large orders push price in an unfavorable direction, creating an implicit cost that increases with order size.

The order book is a real-time list of all outstanding buy and sell orders for a security at various price levels, showing the depth of supply and demand that drives price discovery.

Payment for order flow is a practice where brokers receive compensation from market makers for routing customer orders to them for execution, enabling commission-free trading but raising concerns about execution quality.

Slippage is the difference between the expected execution price of a trade and the actual price at which it fills, typically occurring during volatile conditions or when trading illiquid securities.

A trading halt is a temporary suspension of trading in a specific security ordered by the exchange or regulator, typically due to pending news, regulatory concerns, or extreme price volatility.