3. Volatility, the spread and the order book: the price of buying right now

Level 1: Foundations of Algorithmic Trading

Beyond price, volume and return, there is a second group of variables that explain how risky and how liquid it is to trade an asset at any given moment.

Volatility measures how much the price varies over time. High volatility means large swings; low volatility, more stability. It is the central variable for assessing risk and for pricing derivatives such as options and futures. Volatility is also not constant: it changes over time, which is why specific models exist, such as GARCH, designed purely to forecast how it will evolve.

The bid-ask spread is the difference between the highest price someone is willing to pay for an asset (the bid) and the lowest price at which someone is willing to sell it (the ask). When you buy 'at market', what you actually pay is the ask, not the mid price you see on the chart. That small extra is the cost of wanting to execute the trade right now instead of waiting. Market makers and high-frequency traders devote much of their effort to narrowing that spread in order to capture those small inefficiencies, and a wider-than-normal spread is usually a sign of poor liquidity or of greater perceived risk at that moment.

The order book goes one step beyond the bid-ask: instead of showing only the best buy and sell prices, it shows all resting orders at different price levels, along with their volume. Seeing the full order book tells you not just what the current price is, but how much market depth sits behind it — how many participants are willing to buy or sell before the price moves significantly.

Finally, there are two groups of indicators that a quantitative trader watches even though they are not part of any single asset's price: macroeconomic indicators, such as interest rates, inflation, jobless claims or consumer confidence, which anticipate where the economy as a whole is heading; and the financial indicators of a specific company, such as liquidity, leverage or profitability ratios, which are used to assess its financial health before deciding whether it is worth trading.