Adverse selection occurs when execution is more likely just before market movement makes the trade unfavorable. The resulting lost profit is the adverse selection cost. section 4.2
Increasing order size can raise potential profit but also worsen execution quality: liquidity may be available precisely when the trade is about to lose money. The practical objective is to balance missed opportunity against adverse selection. section 4.2
Order-size trade-off
Requesting $3,000 of stock may execute only $2,000 because sellers do not provide the remaining liquidity. A stylized simulator models adverse selection cost as asc = 0.001 × exp(2 × order_size), where order_size is measured in thousands of dollars, then subtracts it from threshold-dependent markout profit. section 4.2
