Market Microstructure

Overview

Study the micro-level mechanisms of price formation: who is trading, how they are trading, and how trades affect prices. For quantitative strategies, this matters because it improves transaction-cost estimation, identifies informed trading, and optimizes execution.

Applicable scenarios:

• Precise estimation of strategy trading costs (instead of simply assuming a flat 0.1% fee)
• Designing large-order execution strategies (TWAP / VWAP / IS)
• Detecting order-flow toxicity (avoid time windows dominated by informed traders)
• Quantifying liquidity risk (flash-crash warning)
• Capturing China A-share-specific microstructure features (call auction / closing auction / block trades)

Core Concepts

Bid-Ask Spread