CPT Trading Platforms & Regulatory Compliance 3 — Questions and Answers
Question 1: What does the term 'latency arbitrage' describe in electronic trading?
- Trading on news releases before the public announcement
- Exploiting small price differences due to speed advantages over other market participants (Correct answer)
- Arbitraging futures contracts against spot prices across exchanges
- Using delayed settlement to benefit from price swings
Correct answer: Exploiting small price differences due to speed advantages over other market participants
Latency arbitrage involves using faster technology to exploit tiny price discrepancies before slower participants can react.
Question 2: Under the Pattern Day Trader (PDT) rule, a trader in a margin account must maintain a minimum equity of:
- $10,000
- $25,000 (Correct answer)
- $50,000
- $100,000
Correct answer: $25,000
FINRA's PDT rule requires traders who execute four or more day trades in five business days in a margin account to maintain at least $25,000 in account equity.
Question 3: Which platform feature allows a trader to automatically close a position at a predefined profit target?
- Stop-loss order
- Trailing stop
- Take-profit (limit) order (Correct answer)
- OCO order
Correct answer: Take-profit (limit) order
A take-profit order, which is a limit order placed above the current price for a long position, automatically closes a trade when the target profit level is reached.
Question 4: SEC Rule 15c3-5, known as the 'Market Access Rule,' primarily requires broker-dealers to:
- Report all trades within 10 seconds to FINRA
- Implement risk controls before providing clients direct market access (Correct answer)
- Maintain a minimum net capital of $250,000
- Register all algorithmic strategies with the SEC
Correct answer: Implement risk controls before providing clients direct market access
The Market Access Rule requires broker-dealers to have pre-trade risk controls and supervisory procedures in place before providing market access to clients.
Question 5: What is 'slippage' in the context of trade execution on a trading platform?
- The fee charged by the platform for using advanced order types
- The difference between the expected execution price and the actual fill price (Correct answer)
- A platform error that duplicates a submitted order
- The time delay between order submission and confirmation
Correct answer: The difference between the expected execution price and the actual fill price
Slippage is the difference between the price at which a trader expects to execute and the actual price received, often occurring in fast-moving or illiquid markets.
Question 6: A Consolidated Audit Trail (CAT) under SEC rules is designed to:
- Track insider trading by corporate executives only
- Create a comprehensive record of all orders and trades across US equity and options markets (Correct answer)
- Monitor the financial solvency of broker-dealers in real time
- Regulate the use of leverage in futures markets
Correct answer: Create a comprehensive record of all orders and trades across US equity and options markets
The CAT system creates a single, comprehensive database tracking all order lifecycle events across US equity and options markets to enhance regulatory oversight.
Question 7: In a trading platform's order routing system, a 'smart order router' (SOR) is designed to:
- Automatically execute only market orders to avoid price risk
- Route orders to the venue offering the best price and liquidity across multiple exchanges (Correct answer)
- Generate proprietary trading signals using artificial intelligence
- Hold orders until pre-market conditions are met
Correct answer: Route orders to the venue offering the best price and liquidity across multiple exchanges
A smart order router automatically analyzes multiple trading venues and routes orders to achieve the best available execution, fulfilling the broker's best execution obligation.
CPT Trading Platforms & Regulatory Compliance 3
What does the term 'latency arbitrage' describe in electronic trading?