CPT Market Structure & Order Flow Flashcards
6 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 6 CPT Market Structure & Order Flow flashcards as text
What is 'spoofing' in electronic markets, and why is it illegal under the Dodd-Frank Act?
Answer: Placing and then canceling large orders to create a false impression of supply or demand, which manipulates prices
Spoofing involves placing large fake orders to move prices, then canceling them before execution, and was explicitly banned as market manipulation under Dodd-Frank.
What is the primary function of a clearinghouse in exchange-traded markets?
Answer: To act as the central counterparty for all trades, guaranteeing settlement and eliminating counterparty risk
A clearinghouse interposes itself between buyer and seller, becoming the counterparty to both sides and guaranteeing trade settlement even if one party defaults.
In the context of market structure, what is a 'liquidity vacuum' or 'air pocket'?
Answer: A price area with very few resting orders, causing price to move rapidly and with little resistance through that zone
A liquidity vacuum is a price zone where order book depth is thin, allowing prices to travel quickly through those levels when triggered.
What does the term 'VWAP' stand for, and how is it most commonly used by professional traders?
Answer: Volume-Weighted Average Price; used as a benchmark to evaluate execution quality and as an intraday support/resistance level
VWAP calculates the average price weighted by volume throughout the day and is widely used by institutions to benchmark execution and identify intraday trend bias.
What is 'front-running' in financial markets, and why is it prohibited?
Answer: Placing trades based on advance knowledge of a client's pending order to profit from the anticipated price move
Front-running means trading ahead of a known client order for personal gain, violating fiduciary duty and fairness principles, and is illegal market manipulation.
What does 'time and sales' (the 'tape') show that a standard price chart does not?
Answer: The exact sequence, size, and price of every individual transaction as it occurs in real time
Time and sales displays a real-time chronological record of every trade's price, size, and timestamp, letting traders see exactly how transactions are occurring tick by tick.