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 'slippage' in the context of algorithmic trading?
Answer: The difference between expected and actual execution price
Slippage is the difference between the price at which a trade was intended to execute and the price at which it actually executed, often due to market movement or liquidity constraints.
In algorithmic trading, a 'fill-or-kill' (FOK) order requires that:
Answer: The entire order executes immediately or is cancelled
A fill-or-kill order must be executed in its entirety immediately; if the full quantity cannot be filled at once, the order is cancelled.
Which metric best measures an algorithm's ability to avoid adverse market impact when executing large orders?
Answer: Implementation shortfall
Implementation shortfall measures the difference between the decision price and the final execution price, capturing the full cost of trading including market impact.
What does a 'co-location' service provide to high-frequency trading firms?
Answer: Physical placement of servers in or near the exchange's data center
Co-location allows trading firms to place their servers physically close to the exchange's matching engine, reducing network latency to microseconds.
A momentum algorithm that buys assets showing strong recent performance relies on which market anomaly?
Answer: Price continuation
Momentum strategies exploit the price continuation anomaly, where assets that have recently outperformed tend to continue outperforming over short to medium horizons.
What is the primary purpose of a 'kill switch' in an automated trading system?
Answer: To immediately halt all trading activity in case of system malfunction
A kill switch is a risk control mechanism that immediately stops all trading and cancels open orders when triggered, protecting against runaway algorithms.
In backtesting, 'look-ahead bias' occurs when:
Answer: Future data is inadvertently used to make past trading decisions
Look-ahead bias contaminates backtests by allowing the strategy to use information that would not have been available at the time of the historical trade.