Who this page is for — Readers who want to understand what happens between a click and the final outcome. A trading idea does not automatically become a fill: it must be translated into an order, accepted, routed, matched, cleared and settled under defined rules.
Market microstructure studies the mechanisms through which buying and selling intentions become prices and transactions. It covers order rules, quote formation, priority, venues, intermediaries, liquidity and post-trade processes.
This hub reconstructs how established markets and execution practices work. It does not describe a proprietary strategy and does not retrospectively apply the rules of the Emiciclo Method.
The full path of an order
decision
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instruction: side, quantity, type, price, duration
↓
broker or venue controls and acceptance
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routing to a venue, dealer or another counterparty
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priority, matching and one or more fills
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confirmation and clearing
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settlement, recordkeeping and custody
Every step can change the outcome. An order may be rejected, remain pending, be cancelled, receive a partial fill or execute at several prices. A completed trade is not yet the final settlement of securities and money.
The canonical Order lifecycle follows these states without confusing an acknowledgement, a fill, clearing and settlement.
Order types: the first trade-off
| Instruction | What it controls | Main risk |
|---|---|---|
| prioritises immediacy over price control | variable price; multiple or incomplete fills under exceptional conditions | |
| prevents execution at a price worse than the limit | no execution or only a partial fill | |
| activates an order when the specified trigger occurs | trigger price differs from final execution price | |
| activates a limit order after the trigger | the market may move beyond the limit without a fill |
The commercial label is not enough. Trigger references, validity, protections, rounding and gap handling depend on broker, venue and instrument. A limit order may be marketable and remove liquidity; it is not always a maker order.
Duration and additional constraints
The price instruction does not by itself define how long an order remains active or what it may do to a position. These are separate instructions:
| Instruction | Function | Key limitation |
|---|---|---|
| sets duration or immediate behavior: DAY, GTC, GTD/GTT, IOC, FOK | calendars, sessions and variants depend on the venue and broker | |
| attempts to rest a limit order as added liquidity | a marketable order may be rejected, cancelled, repriced or handled differently under the rulebook | |
| prevents an order on supported positions from increasing or reversing exposure | mainly a derivatives or margin function; it is not a stop and does not guarantee closure |
IOC may fill partially and cancel the remainder; FOK instead requires an immediate full fill. AON is not automatically FOK because it may be allowed to wait in some systems. Product documentation must confirm session rules, incompatible flags and the treatment of competing working orders.
Books, quotes and priority
The order book shows displayed limit orders within a specific perimeter. The best bid and best ask form the top of book; quantities at additional levels describe part of the available depth.
The book does not necessarily contain:
- hidden or reserve liquidity;
- conditional orders that have not yet triggered;
- interest available on other venues;
- intentions that will be cancelled before matching;
- participants' identities or economic motivations.
The matching engine applies the rulebook. Price-time priority is common but not universal: different markets may use pro-rata allocation, auctions or hybrid algorithms. The page Order priority and partial fills explains why touching a price does not ensure execution of the full quantity.
Who does what
The roles must be kept separate:
- a trading venue organises the interaction of trading interests under its rules;
- a broker receives, transmits or executes a client's order;
- a dealer may trade on its own account;
- a market maker quotes prices or stands ready to trade within a specified perimeter;
- a CCP may interpose itself between counterparties during clearing;
- CSDs and custodians perform distinct post-trade functions.
One firm may perform more than one role. The interface alone does not reveal the counterparty or where assets are held. See Exchange, broker, dealer and custodian and Trading venues and order routing.
Liquidity and execution cost
Liquidity is multidimensional. A narrow spread, market depth and the book's ability to replenish describe different properties. A market can show an attractive top of book but little quantity beyond the first quote.
| Component | Essential definition |
|---|---|
| distance between the best bid and best ask | |
| difference between a stated benchmark and the execution price | |
| movement attributable to the order itself | |
| Commissions and fees | explicit charges from intermediaries, venues and services |
| Opportunity cost | consequence of unexecuted quantity or delay; estimable but not directly observable |
The canonical Transaction costs prevents double-counting spread, slippage and impact. Execution quality requires benchmarks, timestamps and quantity-weighted fills.
Size, liquidity and execution algorithms
When quantity is material relative to reachable liquidity, its distribution becomes part of the outcome:
- an iceberg or reserve order displays only a tranche and releases reserve quantity under venue rules;
- TWAP may mean either a time-weighted benchmark or an algorithm that works child orders across a window;
- liquidity seeking is a family of strategies combining destinations, time and aggressiveness in the search for liquidity.
None of these labels guarantees a fill, best price or lower impact. Native and synthetic icebergs leave different traces and operational risks; a real TWAP may redistribute unfilled quantity; a liquidity-seeking policy may accept more immediate cost when the opportunity cost of waiting is greater. Parent orders, child orders, cancellations, residuals and benchmarks must remain auditable.
Best execution does not mean a guaranteed price
Under MiFID II, a firm must take all sufficient steps to obtain the best possible result while considering price, costs, speed, likelihood of execution and settlement, size, nature and other circumstances. Total consideration is particularly important for retail clients.
This is a regulatory obligation concerning process, policy and monitoring; it is not a promise that each individual order will obtain, in hindsight, the best price across every possible market. The United States and other jurisdictions use their own rules and terminology. See Best execution.
From fill to settlement
After the trade, clearing, novation through a CCP, netting, depositories, settlement systems and custodians may become involved. In delivery versus payment, the transfer of securities is linked to the transfer of money to reduce principal risk.
OTC does not automatically mean “without rules” or “without clearing”: EMIR requires central clearing for certain classes of OTC derivatives and risk mitigation measures for contracts that are not centrally cleared. The page Clearing, settlement and custody separates these functions.
Short selling also adds securities lending, availability, borrowing costs, recalls and specific rules: pressing “sell” does not describe the entire mechanism.
Reading path
- Order lifecycle
- Market order
- Limit order
- Stop order and stop-limit order
- Time in force, post-only and reduce-only
- Order book and matching engine
- Order priority and partial fills and iceberg orders
- Venues and routing
- Bid-ask spread and liquidity
- Transaction costs, slippage, market impact and latency
- TWAP and liquidity seeking
- Execution quality and best execution
- Clearing, settlement and custody
- Short selling
Neutral operating checklist
Before using an order type or comparing two executions:
- Which entity receives the order, and in what capacity?
- Which venues or counterparties may be used?
- What price triggers a stop: last trade, bid/ask, mark or another reference?
- Which priority and partial-fill rules does the market apply?
- Is the limit marketable, passive, post-only or subject to repricing?
- Which spreads, fees, mark-ups, financing and currency conversions apply?
- Which benchmark and timestamp will measure the result?
- Who performs clearing, settlement and custody?
- Are there securities-lending, recall or buy-in risks?
- Do the broker's and venue's documents confirm what the interface shows?
Sources
- SEC, Investor.gov — Understanding Order Types
- SEC, Investor.gov — Executing an Order
- ESMA — MiFID II, Article 27: Best execution
- ESMA — MiFID II, Article 28: Client order handling
- ECB — Market liquidity, Economic Bulletin 2/2018
- BIS, CPMI-IOSCO — Principles for Financial Market Infrastructures