Markets

What is a double auction?

A market where buyers and sellers both submit price and quantity; the market clears where supply meets demand.

What is a market order?

An order to buy or sell immediately at the best available price.

What is a limit order?

An order to buy or sell at a specific price; may not be filled immediately.

What is the bid-ask spread?

The difference between the lowest ask and highest bid; measures transaction cost and liquidity.

What is a liquidity provider?

Someone who places a limit order that waits in the book.

What is a liquidity taker?

Someone who submits a market order or crosses the spread to trade immediately.

What are stale prices?

Prices that no longer reflect true value due to new information.

How does a standard limit order book (LOB) work?

Orders are processed one at a time based on price and time priority; unmatched orders stay in the book.

What advantage do high-frequency traders (HFTs) have?

Speed—they can act on new info before others and profit from stale orders.

What is arbitrage in financial markets?

Exploiting price differences between related assets (e.g., SPY and ES) to make riskless profits.

Why does serial processing create problems?

It rewards speed over price, causing arms races and inefficiencies.

What is the Frequent Batch Auction model?

A system where orders are processed in short intervals (e.g., every 10ms), eliminating speed advantages.

What is a key feature of batch auctions?

Orders are processed simultaneously with a uniform clearing price.

What is the Fully Continuous Exchange (Kyle & Lee)?

A system where orders specify trade rate and price range; trading happens gradually as prices move.

What are the benefits of continuous exchange?

Reduces need for speed, treats orders symmetrically, helps small traders, and lowers messaging costs.

What is the IEX speed bump?

A 350-microsecond delay that prevents trades at stale prices and protects against HFT.

Why is the IEX speed bump effective?

It gives time to check NBBO and cancel or update orders before execution.

What does pro-rata execution mean?

When demand exceeds supply, orders are filled proportionally.

What’s the main goal of new market designs like batch auctions?

Reduce the value of being faster and promote fairer, more efficient trading.