Algorithmic & Automated Trading Flashcards
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Read the first 7 Algorithmic & Automated Trading flashcards as text
Under SEC Regulation SHO, algorithmic short-selling strategies must comply with which locate requirement?
Answer: The trader must locate borrowable shares before executing a short sale
Regulation SHO requires traders to locate and document that shares can be borrowed before executing a short sale, preventing naked short selling.
What distinguishes a 'statistical arbitrage' strategy from classic arbitrage?
Answer: Statistical arbitrage profits are probabilistic rather than guaranteed
Unlike classic arbitrage which exploits risk-free mispricings, statistical arbitrage uses historical price relationships to make probabilistic bets that may not always converge.
In algorithmic trading, what is an 'order book imbalance' signal?
Answer: The ratio of bid-side volume to ask-side volume used to predict short-term price direction
Order book imbalance measures the relative pressure of buy vs. sell limit orders, which high-frequency traders use as a predictive signal for short-term price movement.
What is 'overfitting' in the context of developing a trading algorithm?
Answer: Optimizing a strategy too closely to historical data so it fails on new data
Overfitting occurs when an algorithm is tuned so precisely to historical noise that it loses predictive power on out-of-sample data.
Which regulatory framework primarily governs algorithmic trading risk controls for US broker-dealers?
Answer: SEC Rule 15c3-5 (Market Access Rule)
SEC Rule 15c3-5 requires broker-dealers with market access to implement pre-trade risk controls, including capital thresholds and erroneous order prevention.
A VWAP benchmark is most appropriate when a trader's primary goal is to:
Answer: Match the average price paid by all market participants during the trading period
VWAP algorithms pace execution to match the day's volume-weighted average price, which institutional investors use as a neutral benchmark reflecting broader market participation.
What is the primary risk of using excessive leverage in an automated trading system?
Answer: Amplified losses that can exceed account equity during adverse market moves
Leverage magnifies both gains and losses; in automated systems operating at high speed, excessive leverage can generate losses far exceeding account equity before risk controls trigger.