# Market Microstructure and Risk Controls

### Why Market Microstructure Matters

Market microstructure describes the rules and mechanics of how trades are executed, prices are formed, and liquidity flows.\
In highly volatile, 24/7 crypto markets, robust microstructure is essential to:

* Ensure fair and orderly trading
* Prevent manipulation and extreme swings
* Protect users from flash crashes or fat-finger trades
* Guarantee settlements and payouts

### ClickOptions controls (CEX Phase1)

#### 1) Reference price integrity

* Primary inputs: **ClickOptions Index** (median-based aggregator) with stale-quote filters and smoothing.
* **Price sanity window:** if **index dispersion** across sources > **0.75%** for **≥ 3 consecutive seconds**, quoting pauses for the affected series until dispersion normalizes.

#### 2) Price protection (order-level)

* **Dynamic trade bandwidth** around mark price (**±2.5%** baseline; wider for illiquid tenors).
* Orders that **cross outside the band are clipped or rejected**.
* Band can auto-widen up to **±5%** during elevated volatility (measured over rolling 60s).

#### 3) Volatility halts (instrument-level)

* **Single-series breaker:** If the **option’s mid** moves **> 12% within 2 seconds** without a commensurate move in the index (spot proxy) **> 2%**, trigger a **60s trading halt** for that series; resume after **30s stability** test.
* **Underlying spike guard:** If **underlying index** moves **≥ 10% within 2 seconds**, trigger a **platform-wide options halt** for that underlying for **60s**, then 30s stability test before resuming.

#### 4) Circuit breakers (session-level)

* **Tiered triggers on underlying (rolling 60s):**
  * **Tier 1:** **±5%/60s** → 30s pause on all series for that underlying.
  * **Tier 2:** **±7.5%/60s** → 60s pause.
  * **Tier 3:** **±10%/60s** → 120s pause + reprice check.
* Resumption requires **mark–index alignment** within **1.0%** and stable dispersion (≤0.5%) for 30s.<br>

#### 5) Position limits (user-level)

* **Per-series:** max **20,000 contracts** notional equivalent (BTC) / **5,000 contracts** (ETH) for long positions in OTM strikes (Pahse1; subject to risk review).
* **Per-underlying:** laddered limits by **tenor bucket** (daily/weekly/monthly/quarterly) to reduce concentration.

#### 6) Vault coverage gates (platform-level)

CoverageRatio formula:

$$
CoverageRatio = \frac{VaultCapital - \left| Exposure\_{adjusted} \right|}{\left| Exposure\_{adjusted} \right|}
$$

Actions:

$$
CoverageRatio < 0.5 ; \text{= disable (ASK) on exposed side}
$$

$$
CoverageRatio < 0.1 ; \text{= disable (ASK) and (BID) on exposed side}
$$

Direction rule:

$$
\Delta\_{portfolio} < 0 : \text{Calls disabled (ASK)}
\quad\quad
\Delta\_{portfolio} > 0 : \text{Puts disabled (ASK)}
$$

PnL safety gate:

$$
\left| PnL\_{unrealized}^{loss} \right| \geq VaultCapital
;;\Rightarrow;; \text{Halt exposed side quotes}
$$

*(These align with the* [*Margin page*](/trade/margin.md) *and ensure we never add risk beyond coverage.)*

#### 7) Auto-deleverage / liquidations (for buyers)

* **Not applicable to buyers** — max loss is the **premium**; no margin calls, no liquidations.
* System-level protections (halts/bands/coverage) prevent disorderly prints and ensure payout capacity.

### Hedging & quote continuity

**External hedges by the professional market maker:**

* **Futures/perpetuals:** reduce exposure **directly by notional** in the coverage calc.
* **Options:** reduce exposure via **delta contribution** only.
* If read-only API connectivity to external venues fails, hedges are **ignored** until feeds recover (conservative default).\
  \&#xNAN;*(NOP / coverage methodology is detailed on the* [*Margin page.*](/trade/margin.md)*)*

### Notes on transparency vs. flexibility

* Some top venues **publish explicit % levels** (e.g., 10%/2s breaker) while others keep bands **dynamic/undisclosed**. We adopt a **hybrid**:
  * **Published baselines** (e.g., ±2.5% bandwidth; 5/7.5/10% breakers),
  * **Risk discretion** to expand bands temporarily (up to ±5%) during abnormal volatility, with post-event disclosure.
* As the market matures (and we launch the DEX), we’ll formalize more as **deterministic formulas**.


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