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Market Microstructure
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01 — Article
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Quiz
Quiz: Limit Order Book Mechanics
Module 1 of 4 · Medium
Quick Quiz
1.
Under price-time priority: A posts a limit buy for 100 @ $50.10, then 5µs later B posts a limit buy for 200 @ $50.10. A sell market order for 150 arrives. How are shares allocated?
A gets 100 and B gets 50 (time priority: A filled first, remainder to B)
A gets 75 and B gets 75 (pro-rata by displayed size)
A gets all 150 (the earliest order fills completely first)
B gets all 150 (the larger order has priority)
2.
Microprice
M
^
=
P
bid
Q
ask
Q
bid
+
Q
ask
+
P
ask
Q
bid
Q
bid
+
Q
ask
\hat M=P_{\text{bid}}\frac{Q_{\text{ask}}}{Q_{\text{bid}}+Q_{\text{ask}}}+P_{\text{ask}}\frac{Q_{\text{bid}}}{Q_{\text{bid}}+Q_{\text{ask}}}
M
^
=
P
bid
Q
bid
+
Q
ask
Q
ask
+
P
ask
Q
bid
+
Q
ask
Q
bid
. Best bid
100.00
×
500
100.00\times500
100.00
×
500
, best ask
100.01
×
100
100.01\times100
100.01
×
100
. What is the microprice and its signal?
100.010 — equal to the ask because the ask is thinner
100.008 — closer to the ask (heavy bid, thin ask), signalling upward pressure
100.005 — a balanced book with no directional signal
100.002 — closer to the bid, signalling downward pressure
3.
In Glosten-Milgrom with fraction
π
\pi
π
informed, two equally-likely value states
V
L
,
V
H
V_L,V_H
V
L
,
V
H
, and break-even quotes, the equilibrium bid-ask spread is:
s
=
(
1
−
π
)
(
V
H
−
V
L
)
s=(1-\pi)(V_H-V_L)
s
=
(
1
−
π
)
(
V
H
−
V
L
)
, set by the uninformed traders
s
=
(
V
H
−
V
L
)
/
2
s=(V_H-V_L)/2
s
=
(
V
H
−
V
L
)
/2
, independent of
π
\pi
π
s
=
π
(
V
H
−
V
L
)
/
2
s=\pi(V_H-V_L)/2
s
=
π
(
V
H
−
V
L
)
/2
, since only half the informed traders buy
s
=
π
(
V
H
−
V
L
)
s=\pi(V_H-V_L)
s
=
π
(
V
H
−
V
L
)
— scales with the informed share and value gap
4.
A Fill-or-Kill (FOK) and an Immediate-or-Cancel (IOC) order both execute immediately; the difference is that FOK allows partial fills while IOC requires a complete fill.
True
False
5.
Cont-Kukanov-Stoikov (2014) find order-flow imbalance (OFI) predicts mid-price changes linearly. Why does OFI beat net signed trade flow as a short-horizon impact predictor?
OFI has longer memory, so it captures more of the eventual impact
OFI removes the adverse-selection component, leaving only the informational part
OFI includes passive quoting and aggressive fills; trade signs miss the quoting
OFI is easier to compute from Level-1 data than trade direction
6.
A maker's limit sell fills, then the mid rises 2 ticks (an adverse-selection loss). In what sense is a resting limit order a 'free option' granted to the market?
It gives the exchange the option to match the order at a better price
It gives the maker an option on the spread income
Anyone may execute against the maker at the quote regardless of moves
It gives the maker the right (but not the obligation) to sell at the ask
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