Adverse selection
The market maker’s core risk: a disproportionate share of fills come from informed traders, so you buy before prices fall and sell before they rise. Glosten–Milgrom (1985), Kyle (1985).
full entry → Almgren–Chriss
The canonical optimal-execution model (2000): trade off market impact against timing risk to find the optimal liquidation trajectory.
full entry → Avellaneda–Stoikov
The canonical inventory-aware market-making model (2008): quote around a reservation price that skews against inventory, governed by risk aversion γ.
full entry → Bid-ask bounce
The artificial sawtooth in trade prices from trades alternating between bid and ask with no change in fair value. Roll (1984).
full entry → Circuit breaker
A pre-set rule that pauses trading when prices move too far too fast. US equities use LULD bands plus market-wide breakers.
full entry → Cointegration
A statistical relationship where a linear combination of non-stationary series is stationary: the basis for a sound pairs trade.
full entry → Colocation
Renting rack space next to the matching engine to minimise the latency from your system to the exchange.
full entry → Fat tails
High-frequency returns have far heavier tails than a normal distribution: extreme moves are routine, not once-in-a-millennium.
full entry → Implementation shortfall
The all-in execution cost: the gap between the decision price and the achieved price, including fees, spread, impact and unfilled opportunity cost. Perold (1988).
full entry → Inventory risk
The danger that filled quotes leave a market maker holding a directional position that moves against them.
full entry → Latency arbitrage
Picking off a stale quote on a slow venue before it updates to match a fast one.
full entry → Lee–Ready
A trade-sign inference algorithm (1991): compare the trade price to the prevailing midpoint to classify buyer- vs seller-initiated.
full entry → Limit order book
The venue’s live, sorted record of all resting bids and asks. The central data structure of every order-driven market.
full entry → Maker-taker
A fee model that pays a rebate to liquidity providers (makers) and charges liquidity takers.
full entry → Market impact
The adverse price move your own trading causes. The square-root law: impact ≈ Y·σ·√(Q/V).
full entry → Microprice
A fair-value estimate weighting bid and ask by the opposite side’s size, leaning toward the heavier queue. Stoikov.
full entry → NBBO
The National Best Bid and Offer: the consolidated best price across all US venues, mandated by Reg NMS.
full entry → Order-flow imbalance
Net pressure from changes in bid vs ask depth over a short window: a robust short-horizon predictor of the next move.
full entry → PIN / VPIN
The probability of informed trading and its volume-bucketed cousin: a toxicity gauge for market makers. Easley–O’Hara.
full entry → Price-time priority
The FIFO rule most venues use: better-priced orders fill first; ties break by arrival time. The reason queue position has value.
full entry → Reg NMS
Regulation National Market System (SEC 2005). The Order Protection Rule requires execution at the best displayed price across venues.
full entry → Reservation price
In Avellaneda–Stoikov, the inventory-adjusted fair value a market maker quotes around; it skews away from current inventory.
full entry → Spoofing
Placing orders you intend to cancel to fake supply or demand. Illegal market manipulation; covered for detection only.
full entry → Spread
The gap between the best bid and best ask: the price of immediacy and the market maker’s gross compensation.
full entry → Square-root law
The empirical rule that market impact scales roughly with the square root of order size relative to volume.
full entry → Tick rule
A simple trade-sign rule: a trade above the prior price is buyer-initiated, below is seller-initiated.
full entry → VWAP / TWAP
Execution schedules that slice a large order: TWAP evenly over time, VWAP to match the volume curve.
full entry →