Module 6 — Professional Quant Topics

Market Microstructure — How Orders Become Prices

Factor models, options pricing, risk, and microstructure — the curriculum interview desks expect.

Module lessons

Factor Models — CAPM to Fama-French to BarraOptions and the GreeksRisk Management — VaR, CVaR, and Position SizingMarket Microstructure — How Orders Become Prices

Learning objectives

  • ▸Read a limit order book.
  • ▸Distinguish maker, taker, and hidden orders.
  • ▸Estimate market impact and effective spread.

TEXT

The book

Every modern exchange runs a central limit order book (CLOB): a stack of bids (buy orders willing to wait) and asks (sell orders waiting). The best bid and best ask define the inside spread. A market order crosses the spread — it 'takes' liquidity. A limit order rests on the book — it 'makes' liquidity. Maker rebates and taker fees create a tiny but persistent revenue stream for HFTs that mostly post.

TEXT

Why HFTs cancel 95% of their orders

Posting a quote is essentially writing a free option for everyone else. If the market moves against your quote, you get adversely selected — only people who know more than you fill you. HFTs constantly re-price to avoid being picked off.

FORMULA

Almgren-Chriss impact

Implementation shortfall ≈ η · (Q/V)^γ · σ · sqrt(T)
where Q = trade size, V = ADV, T = horizon, σ = vol.
Impact scales roughly as sqrt(participation rate) — empirically γ ≈ 0.5.

TEXT

Why this matters for backtests

Most backtests fill at the close, mid, or VWAP. None of these are achievable in size. Realistic backtests model fills via a slippage function calibrated to your expected order size relative to ADV.

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