Learning outcomes: Summarize the lifecycle of a new trading strategy for a trading firm. Describe a firm’s risk management structure and the role of risk platforms. Explain the pre-trade and post-trade risk controls employed by trading firms. Describe the key challenges and best practices in firms’ risk management.
Questions:
503.1. What is a drop copy?
a. A pre-trade risk control
b. A post-trade risk control
c. A regulatory filing in the case of an out-of-control algorithm
d. A duplicate trade that is erroneous; aka, a dropped trade copy
503.2. About proprietary firms and high frequency trading (HFT), each of the following is true EXCEPT which statement is false?
a. A algorithmic trader who is human but executes at least one hundred (100) trades over the course of a day meets the definition of a high speed trader
b. Proprietary trading firms often trade using their own capital but do not have customers; they tend to trade on public exchanges but some also trade on alternative trading systems
such as ECNs and dark pools.
c. Regulation National Market System (NMS) was designed to obtain the best price for investors (among other objectives) but is criticized for unintended consequences
d. Black box trading strategies are 100% automated, pre-programmed, and traders cannot interact or modify the algorithms; grey box trading strategies are also 100% automated, but traders are able to modify the configurations for algorithms at their own discretion
503.3. Among survey participants in Clark and Ranjan's paper ("How Do Proprietary Trading Firms Control the Risks of High Speed Trading?"), each of the following is a popular response by prop trading firms EXCEPT which is unlikely to be a popular sentiment?
a. Obtaining information on OTC data is a huge problem
b. Modeling stress test scenarios to replicate events like May 6, 2010 is a challenge
c. Regulators should prescribe vendor solutions and specific guidance on risk management solutions
d. Because risk is constantly changing, we hold period meetings with cross-functional teams to identify and manage emerging issues
Answers here:
Questions:
503.1. What is a drop copy?
a. A pre-trade risk control
b. A post-trade risk control
c. A regulatory filing in the case of an out-of-control algorithm
d. A duplicate trade that is erroneous; aka, a dropped trade copy
503.2. About proprietary firms and high frequency trading (HFT), each of the following is true EXCEPT which statement is false?
a. A algorithmic trader who is human but executes at least one hundred (100) trades over the course of a day meets the definition of a high speed trader
b. Proprietary trading firms often trade using their own capital but do not have customers; they tend to trade on public exchanges but some also trade on alternative trading systems
such as ECNs and dark pools.
c. Regulation National Market System (NMS) was designed to obtain the best price for investors (among other objectives) but is criticized for unintended consequences
d. Black box trading strategies are 100% automated, pre-programmed, and traders cannot interact or modify the algorithms; grey box trading strategies are also 100% automated, but traders are able to modify the configurations for algorithms at their own discretion
503.3. Among survey participants in Clark and Ranjan's paper ("How Do Proprietary Trading Firms Control the Risks of High Speed Trading?"), each of the following is a popular response by prop trading firms EXCEPT which is unlikely to be a popular sentiment?
a. Obtaining information on OTC data is a huge problem
b. Modeling stress test scenarios to replicate events like May 6, 2010 is a challenge
c. Regulators should prescribe vendor solutions and specific guidance on risk management solutions
d. Because risk is constantly changing, we hold period meetings with cross-functional teams to identify and manage emerging issues
Answers here:
