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
What is 'quote stuffing' and why is it considered a manipulative practice?
Answer: Flooding the market with rapid order submissions and cancellations to slow competitors' systems
Quote stuffing involves submitting and cancelling large numbers of orders rapidly to overwhelm competitors' systems, distorting price discovery and creating an unfair speed advantage.
In machine learning-based trading algorithms, what is the purpose of a 'train/test split'?
Answer: Separating historical data so the model is evaluated on data it was never trained on
A train/test split reserves a portion of historical data exclusively for evaluating model performance, preventing overfitting and providing an honest out-of-sample assessment.
Which of the following is a key advantage of using limit orders over market orders in algorithmic trading?
Answer: Price certainty and potential to capture the spread as a liquidity provider
Limit orders specify a maximum buy or minimum sell price, protecting the trader from adverse fills and potentially earning the spread when acting as a market maker.
What does 'mean reversion' assume about asset prices?
Answer: Prices that deviate significantly from a historical average will tend to return to that average
Mean reversion strategies assume that extreme price deviations from a historical mean are temporary and that prices will eventually revert to their long-term average.
A trading firm's algorithm generates 50,000 order messages per second but only executes 10 trades. Regulators might view this activity as:
Answer: Potential spoofing or quote stuffing requiring investigation
A very high order-to-trade ratio (messages vs. actual executions) is a red flag for manipulative practices like spoofing or quote stuffing, attracting regulatory scrutiny.
What is the primary difference between a 'backtest' and 'paper trading' when evaluating an algorithm?
Answer: Backtests use historical data while paper trading runs the live algorithm with simulated capital in real time
Backtesting simulates performance on historical data, while paper trading runs the actual live algorithm in real market conditions without risking real capital.
In the context of algorithmic trading, what does 'adverse selection' mean for a market-making algorithm?
Answer: Being on the wrong side of trades with informed traders who have superior information
Adverse selection occurs when a market maker's limit orders are disproportionately hit by informed traders, resulting in inventory positions that move against the market maker.