Stock Trading Technology & Digital Applications 2 — Questions and Answers
Question 1: What does the term 'algorithmic trading' refer to?
- Trading based on news headlines only
- Using computer programs to execute trades based on predefined rules (Correct answer)
- Manual trading with algorithmic charting software
- Trading only ETFs and index funds
Correct answer: Using computer programs to execute trades based on predefined rules
Algorithmic trading uses automated programs to execute orders based on criteria like price, volume, or timing.
Question 2: Which order type is typically used by algorithmic traders to avoid moving the market when buying large positions?
- Market order
- TWAP (Time-Weighted Average Price) order (Correct answer)
- Stop-loss order
- Limit order at the ask
Correct answer: TWAP (Time-Weighted Average Price) order
TWAP orders spread large trades over time to minimize market impact and avoid price slippage.
Question 3: What is 'latency' in the context of electronic trading?
- The bid-ask spread on a security
- The delay between sending a trade order and its execution (Correct answer)
- The overnight fee for holding leveraged positions
- The time required to settle a trade
Correct answer: The delay between sending a trade order and its execution
Latency refers to the time delay in transmitting trade orders, which is critical in high-frequency trading environments.
Question 4: A trader uses a Direct Market Access (DMA) platform. What is the primary advantage?
- Access to insider information
- Bypassing intermediaries to place orders directly on exchange order books (Correct answer)
- Guaranteed best execution at any price
- Free commissions on all trades
Correct answer: Bypassing intermediaries to place orders directly on exchange order books
DMA allows traders to route orders directly to an exchange's order book, reducing intermediary delays and costs.
Question 5: Which technology do most US stock exchanges use to display real-time quotes to traders?
- FIX Protocol feeds
- Level II quotes from market makers and ECNs (Correct answer)
- Bloomberg Terminal exclusively
- EDGAR filing system
Correct answer: Level II quotes from market makers and ECNs
Level II quotes show the full depth of the order book, displaying bids and asks from multiple market makers and ECNs.
Question 6: What does 'backtesting' a trading strategy mean?
- Testing a strategy on paper without real money
- Running a strategy against historical data to evaluate past performance (Correct answer)
- Having a second trader verify your trades
- Submitting trades after market close for next-day execution
Correct answer: Running a strategy against historical data to evaluate past performance
Backtesting applies a trading strategy to historical price data to assess how it would have performed in the past.
Question 7: What is an Electronic Communication Network (ECN) in stock trading?
- A government database of all stock trades
- An automated system that matches buy and sell orders electronically outside traditional exchanges (Correct answer)
- A news feed aggregator for traders
- A type of mutual fund settlement system
Correct answer: An automated system that matches buy and sell orders electronically outside traditional exchanges
ECNs are automated trading systems that match buyers and sellers directly, often offering after-hours trading and tighter spreads.
Stock Trading Technology & Digital Applications 2
What does the term 'algorithmic trading' refer to?