We analyze the generation of spin-squeezed states via coupling of three-level atoms to an optical cavity and continuous quantum measurement of the transmitted cavity field in order to monitor the evolution of the atomic ensemble. Using analytical treatment and microscopic simulations of the dynamics, we show that one can achieve significant spin squeezing, favorably scaling with the number of atoms $N$. However, contrary to some previous literature, we clarify that it is not possible to obtain Heisenberg scaling without the continuous feedback that is proposed in optimal approaches. In fact, in the adiabatic cavity removal approximation and large $N$ limit, we find the scaling behavior $N^{-2/3}$ for spin squeezing and $N^{-1/3}$ for the corresponding protocol duration. 
These results can be obtained only by considering the curvature of the Bloch sphere, since linearizing the collective spin operators tangentially to its equator yields inaccurate predictions.
With full simulations, we characterize how spin-squeezing generation depends on the system parameters and departs from the bad cavity regime, by gradually mixing with cavity-filling dynamics until metrological advantage is lost. Finally, we discuss the relevance of this spin-squeezing protocol to state-of-the-art optical clocks.