# Market Microstructure & Trading Strats Szymon Kopyciński · 23 September 2026 ## 1. Market microstructure ### Market microstructure The study of how trading mechanisms affect prices, liquidity, execution and behaviour. It deals with questions such as: - How are orders matched? - How does information enter prices? - Why do spreads exist? - What determines queue position? - How does order flow affect short-term price movement? It draws on economics, statistics, trading and engineering. ### Order flow The stream of buying and selling activity entering a market. Traders study whether order flow predicts short-term price movement. ### Order book imbalance A measure comparing displayed liquidity on the bid and ask sides of the book. A simple version is: $$ I = \frac{B - A}{B + A} $$ where $B$ is bid quantity and $A$ is ask quantity. Positive imbalance means more displayed bid quantity; negative imbalance means more displayed ask quantity. ### Adverse selection The risk that someone trading against you has better information than you do. Suppose you continuously offer to sell at £100.01. If informed traders disproportionately buy from you just before the market rises to £100.10, your fills are systematically poor. This is adverse selection. ### Toxic flow Informal term for order flow that tends to be particularly adverse to a liquidity provider. ### Informed trader A trader whose actions contain information about future prices or market conditions. This does not imply illegal inside information: they may simply have a better model, faster data or a better interpretation of public information. ### Price discovery The process through which trading causes information to become reflected in market prices. ### Fragmentation The splitting of liquidity across multiple venues. Traders may need to combine data from several venues to see the whole market. ## 2. Trading styles and strategies ### Strategy A defined method for deciding when and how to trade. A quantitative strategy expresses those decisions through explicit rules or models. ### Systematic trading Trading according to predefined rules or models, usually implemented in software. ### Discretionary trading Trading where a human trader exercises judgement in making decisions. Many approaches combine elements of both systematic and discretionary trading. ### Signal A piece of information used to predict something relevant to trading. A signal might predict: - future return; - volatility; - order flow; - liquidity; - relative value; - another market property. ### Alpha Return generated by information or skill rather than by taking broad market risk. In practice, _alpha_ is often used to mean any predictive edge or profitable signal. ### Edge Any persistent advantage that produces positive expected value. An edge might come from: - better modelling; - better execution; - lower costs; - faster systems; - better data; - superior risk management; - market structure. ### Market making Continuously quoting both buy and sell prices with the aim of earning the spread while managing inventory and adverse-selection risk. A market maker might quote: ``` BUY 99.98 SELL 100.02 ``` and aim to trade on both sides. ### Arbitrage Profiting from inconsistent prices for economically equivalent or closely related assets. True risk-free arbitrage is rare and short-lived. The word is also used more broadly for relative-value strategies. ### Statistical arbitrage / Stat arb A broad family of systematic strategies that exploit statistical relationships between securities. Despite the name, these strategies carry real risk. ### Pairs trading A strategy involving two historically or economically related instruments. A trader aims to profit when their relationship deviates from its normal level and then reverts. ### Mean reversion The tendency of a variable that moves away from its typical level to move back towards it. Mean-reversion strategies aim to profit from temporary price dislocations. ### Momentum The tendency for assets that have recently moved in one direction to continue moving in that direction over some horizon. ### Trend following Trading based on sustained price trends. Trend-following strategies buy rising markets and sell or short falling markets according to predefined rules. ### Carry Return earned from holding a position, separate from any change in its price, such as dividends, coupons, interest-rate differentials or futures roll yield. The exact meaning differs between asset classes. ### Basis The difference between two related prices. The most common example is the difference between the spot price of an asset and the price of a futures contract on it. Sign conventions vary between markets. ### Relative value Trading based on differences between related securities rather than on whether the whole market will rise or fall. ### Directional trading Taking exposure based on the expectation that a price will rise or fall. ### High-Frequency Trading / HFT Highly automated trading with very short time horizons and strong sensitivity to latency. HFT is not one strategy: market making, arbitrage and other strategies can all operate at high frequency. ### Medium-Frequency Trading / MFT Systematic trading on horizons slower than HFT but faster than traditional longer-term investing. There is no universal cutoff. ### Low-frequency strategy A strategy that trades relatively infrequently, holding positions for days, weeks or longer. Part of [Glossary Index](/blog/glossary-index) · Previous: [Orders, Matching & Execution](/blog/glossary-index/glossary-orders-matching-execution) · Next: [Positions, PnL & Risk](/blog/glossary-index/glossary-positions-pnl-risk)