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CFA Level III > Trading > Flashcards

Flashcards in Trading Deck (15)
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1
Q

Market Order

A

execute trade immediately at best possible price; time > price

price uncertainty

2
Q

Limit Order

A

trade at limit price or better; price > time

  • buy: price < limit price
  • sell: price > limit price

execution uncertainty

3
Q

Effective Spread

A

2 * | execution price - midquote |

eff spread > quoted spread = bad trade

lower spread = higher liquidity

4
Q

Market Quality Characteristics

A
  1. liquidity (larger bid-ask spreads)
  2. transparency
  3. assurity of completion
5
Q

Dealer Market

A

quote-driven market

dealer has an inventory of securities and trades at bid/ ask prices; liquidity, credit risk

6
Q

Trader Market

A

quote-driven market

prices set by supply and demand; lower liquidity

electronic crossing network, auction market, automated auctions

7
Q

Brokered Market

A

broker acts as trader’s agent to find counterparties for trades

anonimity

8
Q

VWAP

A

volume weighted average price

+ easy, simple, fast, small trades

  • can be “gamed”, doesn’t consider delayed/ unfilled orders or trade volume
9
Q

IS

A

implementation shortfall; emphasis on speed, limits costs

+ identify costs/ trade offs, cannot be “gamed” (considers delays; cannot delay trade to make profit)

  • more complicated, need data
10
Q

Explicit Trade Costs

A

fees, commisions

11
Q

Implicit Trade Costs

A

delay/ slippage = | BP* - DP | * # shares executed later

market/ price impact = | EP - DP or BP* | * # shares executed at EP

opportunity cost = | CP - DP | * # shares canceled

12
Q

Trader Types

A
  1. info motivated: time; market order
  2. value motivated: price; limit order
  3. liquidity motivated: time; market order
  4. passive: price; market order
13
Q

Trading Tactic

A
  1. liquidity at any cost: info motivated
  2. costs not important: many
  3. need trustworthy agent: not info motivated
  4. advertise to draw liquidity: not info motivated
  5. low cost whatever liquidity: passive, value motivated
14
Q

Algorithmic Trading

A
  1. logical participation
    1. break up orders to exc at better price: VWAP, TWRR, % volume
    2. implementation shortfall
  2. opportunistic
  3. specialized = hunter, market on close, smart routing
15
Q

Best Execution Characteristics

A
  1. related to inv decision
  2. only assessed after the trade
  3. ongoing process (including disclosure and record retention)