Algorithmic & Automated Trading Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Algorithmic & Automated Trading flashcards as text
Which order routing strategy breaks a large order into smaller pieces executed over time to minimize market impact?
Answer: Time-weighted average price (TWAP) algorithm
A TWAP algorithm divides a large order into equal-sized slices executed at regular intervals throughout a defined time window to minimize market impact.
What is 'latency arbitrage' in electronic trading?
Answer: Exploiting price differences between geographically distant exchanges using faster data feeds
Latency arbitrage involves exploiting informational advantages gained by accessing faster market data feeds to trade ahead of slower market participants.
In a pairs trading strategy, when the spread between two cointegrated assets widens significantly, the algorithm should:
Answer: Sell the outperforming asset and buy the underperforming asset
Pairs trading exploits mean reversion by selling the relatively overvalued asset and buying the relatively undervalued one, expecting the spread to narrow.
What does 'alpha decay' mean for a trading algorithm?
Answer: The gradual erosion of a strategy's edge as markets adapt or competitors replicate it
Alpha decay describes the diminishing profitability of a trading strategy over time as market participants discover and arbitrage away the same opportunity.
Which of the following best describes 'dark pool' trading?
Answer: Private exchanges where large institutional orders are matched without public pre-trade transparency
Dark pools are private trading venues that allow large institutional orders to be matched without displaying quotes publicly, reducing market impact.
A trading algorithm's 'Sharpe ratio' is calculated using:
Answer: Excess return over the risk-free rate divided by the standard deviation of returns
The Sharpe ratio measures risk-adjusted return by dividing the portfolio's excess return (above the risk-free rate) by its return volatility (standard deviation).
What is the role of a 'market maker' algorithm?
Answer: To simultaneously post buy and sell limit orders, profiting from the bid-ask spread
Market-making algorithms continuously post bids and offers, earning the spread while managing inventory risk, thereby providing liquidity to the market.