CPT Algorithmic & Automated Trading 3

Question 1

Which order routing strategy breaks a large order into smaller pieces executed over time to minimize market impact?

Accepted Answer

Time-weighted average price (TWAP) algorithm

Answer

A TWAP algorithm divides a large order into equal-sized slices executed at regular intervals throughout a defined time window to minimize market impact.

Question 2

What is 'latency arbitrage' in electronic trading?

Accepted Answer

Exploiting price differences between geographically distant exchanges using faster data feeds

Answer

Latency arbitrage involves exploiting informational advantages gained by accessing faster market data feeds to trade ahead of slower market participants.

Question 3

In a pairs trading strategy, when the spread between two cointegrated assets widens significantly, the algorithm should:

Accepted Answer

Sell the outperforming asset and buy the underperforming asset

Answer

Pairs trading exploits mean reversion by selling the relatively overvalued asset and buying the relatively undervalued one, expecting the spread to narrow.

Question 4

What does 'alpha decay' mean for a trading algorithm?

Accepted Answer

The gradual erosion of a strategy's edge as markets adapt or competitors replicate it

Answer

Alpha decay describes the diminishing profitability of a trading strategy over time as market participants discover and arbitrage away the same opportunity.

Question 5

Which of the following best describes 'dark pool' trading?

Accepted Answer

Private exchanges where large institutional orders are matched without public pre-trade transparency

Answer

Dark pools are private trading venues that allow large institutional orders to be matched without displaying quotes publicly, reducing market impact.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Algorithmic & Automated Trading 3