CPT Algorithmic & Automated Trading 2

Question 1

What is 'slippage' in the context of algorithmic trading?

Accepted Answer

The difference between expected and actual execution price

Answer

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.

Question 2

In algorithmic trading, a 'fill-or-kill' (FOK) order requires that:

Accepted Answer

The entire order executes immediately or is cancelled

Answer

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.

Question 3

Which metric best measures an algorithm's ability to avoid adverse market impact when executing large orders?

Accepted Answer

Implementation shortfall

Answer

Implementation shortfall measures the difference between the decision price and the final execution price, capturing the full cost of trading including market impact.

Question 4

What does a 'co-location' service provide to high-frequency trading firms?

Accepted Answer

Physical placement of servers in or near the exchange's data center

Answer

Co-location allows trading firms to place their servers physically close to the exchange's matching engine, reducing network latency to microseconds.

Question 5

A momentum algorithm that buys assets showing strong recent performance relies on which market anomaly?

Accepted Answer

Price continuation

Answer

Momentum strategies exploit the price continuation anomaly, where assets that have recently outperformed tend to continue outperforming over short to medium horizons.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Algorithmic & Automated Trading 2