CFA Global Markets & Trading Flashcards

Which type of market structure uses a central counterparty to match buy and sell orders?

Answer: Exchange-traded market (order-driven market)

Exchange-traded markets use a centralized order book where buyers and sellers are matched through a formal exchange with standardized rules.

The efficient market hypothesis (EMH) in its strong form states that:

Answer: All public and private information is already reflected in stock prices

The strong form of EMH holds that even insider information is incorporated into asset prices, making it impossible to consistently earn excess returns.

Dark pools in equity markets are best described as:

Answer: Private trading venues where large block orders can be executed anonymously

Dark pools are private exchanges or forums for trading securities without displaying orders publicly, often used by institutional investors to minimize market impact.

Currency carry trade involves:

Answer: Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency

The carry trade exploits interest rate differentials between countries by borrowing cheaply in one currency and investing where yields are higher.

Which settlement cycle is standard for US equity trades as of 2024?

Answer: T+1 (one business day after trade date)

The US moved to T+1 settlement for equities in May 2024, reducing counterparty and systemic risk compared to the previous T+2 standard.

High-frequency trading (HFT) firms primarily generate profits through:

Answer: Capturing tiny bid-ask spreads across a very large number of rapid trades

HFT firms use ultra-fast algorithms to trade at extremely high volumes, profiting from small price discrepancies and market-making spreads.