Market microstructure is the study of how trading mechanisms produce prices. It sounds academic and it is intensely practical: it is the difference between believing you paid the price on the screen and knowing what you actually paid.

At any moment, someone is demanding immediacy and someone is supplying it. The demander crosses the spread with a market order and pays for certainty of execution. The supplier rests a limit order and gets paid the spread in exchange for taking on the risk that the price moves away before they are filled — or worse, that they are filled precisely because it is about to.

That last risk has a name and it is the central concept in market making: adverse selection. If someone lifts your offer, one of two things is true. Either they needed liquidity and you have earned the spread, or they know something and you have just sold something cheaply to an informed buyer. A market maker's entire business is widening the spread enough to be paid for the second case while staying tight enough to win the first. This is why spreads widen before news and around expiry, and it is a far better explanation than ‘volatility’.

• Order processing — the mechanical cost of being in the market. Small, and it has fallen enormously.
• Inventory risk — a market maker who buys from you now holds a position they did not want and must manage.
• Adverse selection — the cost of trading against people who know more. This is usually the dominant term and it is why spreads in a stock with an earnings announcement tomorrow are wider than the same stock's spread last week.

The quoted spread only applies to the quantity available at the touch. Beyond that you are walking the book. Two distinct things then happen, and conflating them is a common error:

• Temporary impact — you consumed liquidity, the book is thinner, and the price is worse until market makers replenish. This decays.
• Permanent impact — other participants infer from your trading that someone informed is buying, and they update their own prices. This does not decay, because it is information rather than a liquidity gap.
• Empirically, impact scales roughly with the square root of the fraction of daily volume you trade, not linearly. Doubling your order size does not double your impact; it multiplies it by about 1.4. That single relationship underpins most execution algorithm design, and being able to state it — while noting it is an empirical approximation and not a law — is a strong signal in an execution interview.

Continuous trading is not the only mechanism. Most markets open and close with an auction: orders accumulate without matching, and at a single moment the exchange computes the price that maximises executable volume and crosses everything at that one price.

Auctions matter more than their share of the day suggests. The closing auction is where index funds, ETFs and anyone benchmarked to the close must trade, which makes it the single largest liquidity event of the day in most markets and a place where enormous size can transact with little impact. It is also a place with distinctive manipulation risk — ‘marking the close’ — which is why surveillance systems watch it specifically.

• Pre-open call auction, 09:00 to 09:08, with random closure to prevent last-instant gaming, then order matching and a transition to continuous trading at 09:15.
• Price bands and circuit filters. Individual scrips have daily bands; the index has market-wide circuit breakers at 10%, 15% and 20% that halt the entire market for defined periods. An order outside the band is rejected, which surprises people who assume rejection means a technical fault.
• Tick size is small and uniform in most segments, so the spread in liquid Indian large-caps is frequently one or two ticks — extremely tight by global standards.
• The options book is the interesting one. India has been, by contract volume, the largest derivatives market in the world for several years, driven overwhelmingly by index options. The microstructure of a weekly index option near expiry — where an option can go from a few rupees to zero within an hour — is genuinely unusual and it is the market an Indian trading interview will actually ask you about.