sica-fondt/core/docs/plans/M3g-market-microstructure-sims.md

M3g — Market microstructure sims

1. Component

Market microstructure simulation: models order flow, liquidity depth, slippage, spread dynamics, optimal execution, and cross-exchange arbitrage at the fastest time scales. Pops here are market makers, takers, and arbitrageurs interacting across multiple venues. Includes the Almgren-Chriss optimal execution framework for minimizing market impact of large orders. Operates at the highest temporal resolution — where M3a provides statistical forecasts and M3c models pool mechanics, M3g models the plumbing of how orders actually execute, across six concurrent time horizons at tick-advanced, 90:1 (1s wall = 90s sim).

2. Status / certainty

DESIGN-FIRST · ABSENT. Order-book microstructure theory C4 (established). Almgren-Chriss optimal execution C5 (industry standard since 2001; crypto adaptations validated 2023–2024, Kurz CMC thesis). DEX-specific microstructure C2 (emerging). Implementation C1.

3. Language & location

TBD · src/economy/sims/microstructure/. Needs high-frequency data handling, event-driven simulation, and Riccati equation solvers for optimal execution trajectories. C++, Fortran, or Julia.

4. Does / does-not

• Does: simulate order flow across venues (DEXs and CEXs); model bid-ask spread dynamics as a function of inventory risk and adverse selection; simulate slippage curves for various order sizes; solve Almgren-Chriss optimal execution: \min \int_0^T [\lambda \cdot x(t) \cdot \dot{x}(t) + \eta \cdot \dot{x}(t)^2] \, dt where \lambda = permanent impact, \eta = temporary impact, x(t) = remaining order — splits large orders across time to minimize market impact + timing risk; impact parameters \lambda, \eta re-estimated from order-flow streams every 10–30s; execution trajectory solved via Riccati equations in <100ms; model cross-exchange arbitrage opportunities and their decay; operate at tick-level resolution (sub-second to minute); produce bounded predictions on execution quality, optimal routing, and liquidity conditions.
• Does-not: model protocol consensus (M3f); model macro token supply (M3e); model social behavior (M3b); execute trades (Marketplace does).

5. Interface contract

• Implements query(PredictionQuery) -> BoundedPrediction per M3 hub.
• Output bounds: execution cost ranges, liquidity intervals, optimal trajectory envelopes.
• Time-horizon mapping (all run concurrently, tick-advanced, 90:1 (1s wall = 90s sim)):

  Horizon	Primary models	Update cadence
  Tick–hourly	Almgren-Chriss execution, slippage, spread, arb decay	Every tick
  Daily	Liquidity regime, venue depth profiles	Hourly roll
  Weekly	Cross-venue flow patterns, impact parameter drift	Daily roll
  Monthly	Structural liquidity shifts, venue market share	Weekly roll
  Annual	Microstructure regime (DEX vs CEX share evolution)	Monthly roll
  5-year	Venue topology evolution, structural impact trends	Quarterly roll

• Examples: { value: 0.0034, lower_bound: 0.0018, upper_bound: 0.0052, confidence: 8.50, time_horizon: "next_trade", sim_type: "market_microstructure" } — slippage (%) for 10 ETH. { value: 12400, lower_bound: 8200, upper_bound: 18600, confidence: 7.80, time_horizon: "1h", sim_type: "market_microstructure" } — depth (USD) within 50bps. { value: [0.3, 0.3, 0.2, 0.1, 0.1], lower_bound: null, upper_bound: null, confidence: 8.00, time_horizon: "30min", sim_type: "market_microstructure" } — Almgren-Chriss optimal execution schedule (fraction per 6-min bucket for 100 ETH sell).
• Prediction types: slippage_estimate, spread_forecast, depth_profile, cross_venue_arb, optimal_execution_schedule, optimal_execution_route, liquidity_score, impact_estimate.
• Calibration: ingests price_tick, dex_pool_state, and execution_fill from M2.

6. Dependencies & stubs

• M2 Data Feeds — tick data and pool state; stub: canned order book snapshots.
• M3a Statistical — volatility estimates for Almgren-Chriss timing risk; stub: fixed vol.
• M3c AMM sims — pool mechanics for DEX venues; stub: fixed pool state.
• M3 Sims hub — lifecycle management; stub: manual init.

7. Invariants / laws

• L1 (C5): microstructure operates at the highest temporal resolution — predictions are valid for seconds to hours, not days. Stale microstructure data is worse than no data.
• L2 (C5): slippage is a function of order size and current depth — not a fixed percentage. The sim must model the non-linear relationship.
• L3 (C5): Almgren-Chriss impact parameters \lambda, \eta are estimated from live data, never hardcoded — crypto impact dynamics differ by asset, venue, and time-of-day.
• L4 (C4): cross-venue arbitrage opportunities decay — the sim models the time-to-close of an arb opportunity, not just its existence.
• L5 (C4): optimal execution trajectories are re-solved on every significant state change (vol spike, depth drop, regime transition) — a stale trajectory is worse than naive execution.

8. Build steps

1. Implement a simplified order-book simulator (limit orders, market orders, cancels).
2. Add spread dynamics (inventory-based market maker model).
3. Add slippage curves (order size → execution cost).
4. Implement Almgren-Chriss optimal execution (Riccati solver, impact estimation).
5. Add cross-venue arb detection and decay modeling.
6. Wire M2 tick data → calibration of impact parameters.
7. Wire M3a vol estimates → Almgren-Chriss timing risk component.

9. Tests

Slippage: larger orders produce greater slippage. Spread: spread widens under adverse selection. Almgren-Chriss: optimal trajectory minimizes total cost vs. naive execution on backtest; impact parameters update when market conditions change. Arb decay: detected arb opportunity closes over time. Depth: depth profile matches order book state. Bounds: all outputs bounded. Resolution: predictions update at tick frequency. Speed: sim tick-advances at 90:1.

10. Open items

• CEX order book data access (API limitations, costs).
• DEX-specific microstructure (AMM pools don't have order books — translate pool state to equivalent depth/spread).
• Latency modeling (how fast can our traders actually reach an arb?).
• Almgren-Chriss extensions for crypto (volume-dependent variant? discrete block propagation?).
• Which venues to model initially.