Trading-side interviews assume basic microstructure literacy. This is the minimum.
The two order types
A limit order specifies a price and rests in the book until filled or cancelled. It provides liquidity, and typically earns a rebate or at least avoids paying the spread.
A market order executes immediately against the best available prices. It consumes liquidity and pays the spread.
The core trade-off: limit orders get a better price but may not fill; market orders fill for certain but at a worse price. That is the same immediacy trade-off that the spread prices.
Price-time priority
Most exchanges match on price first, then on time of arrival. Among orders at the same price, the one that arrived first fills first.
Consequences that matter:
- Queue position is valuable. Being first in the queue at the bid means you fill on smaller trades and can cancel if the market turns. Being last means you fill mainly when the price is about to go through you - which is adverse selection.
- Cancelling and re-entering loses your place. So a market maker adjusting a quote pays a real cost.
- Latency matters even without prediction, purely for queue position.
Reading the book
Depth on the bid relative to the ask is often described as a signal of buying pressure. Treat that with scepticism in an interview - resting orders are cancellable intent, not commitment, and displayed size can be strategic or spoofed. Much genuine size is hidden.
The honest statement: the book tells you about current resting liquidity, which is useful for estimating impact, and only weakly about direction.
Hidden and iceberg orders
Large participants avoid displaying full size, using iceberg orders that show a small portion and replenish. So visible depth understates true depth, unevenly.
Why market makers care
Their business is holding attractive queue positions on both sides, filling against uninformed flow, and cancelling fast when the picture changes. Much of the technology arms race is about doing that faster.
Practise in market making.