Learning objectives: Explain the pre-trade risk controls used by exchanges. Describe offerings exchanges make to their clients to help manage risk. Describe monitoring for and mitigation of abnormal trading and market manipulation.
Questions:
504.1. Each of the following is an example of a common pre-trade risk control used by exchanges EXCEPT which is not?
a. Message throttles
b. Maximum order size
c. Trade cancellation or adjustment policies
d. Price banding mechanism; aka, price collars
504.2. The article by Clark and Ranjan (How Do Exchanges Control the Risk of High Speed Trading ?) summarizes "what was learned during conversations with management at five exchanges that offer equities, futures, and/or options products. The interviews focused on risk controls and other topics of interest or concern to exchange staff." What did the authors find with respect to practices at the exchanges in the case of extreme scenarios?
a. Some exchanges do offer kill buttons; and all five exchanges do offer "cancel on disconnect" but the functionalities/definitions are not standardized
b. No exchanges yet offer kill buttons; but all five exchanges do offer "cancel on disconnect" with functionalities/definitions that are already highly standardized
c. No exchanges yet offer either kill buttons or "cancel on disconnect," but out-of-control algorithms which are identified according to a standardized definition
d. Monitoring for erroneous trades and manipulative market practices via the Intermarket Surveillance Group (ISG) is the best way to thwart order manipulation instantaneously
504.3. Each of the following statements is a conclusion or argument in the article "How Do Exchanges Control the Risk of High Speed Trading?" EXCEPT which is not?
a. Regulators with deep market knowledge and regulations that do not result in unintended consequences or regulatory arbitrage are needed. Otherwise trading firms may migrate to other regions where regulation is less stringent
b. A critical way trading firms monitor their positions in the market is by reconciling the trade report generated on their trading platform with the exchange drop copy; most exchanges provide drop copy in real time
c. One way exchanges can limit firms’ financial exposures is by establishing credit or position limits; however, the fragmented structure of U.S. markets creates challenges in practice
d. Exchange staff asserted that high-speed trading firms do not provide liquidity to markets and were concerned that high-speed trading will mushroom given HFT is novel and has not nearly reached its saturation point
Answers here:
Questions:
504.1. Each of the following is an example of a common pre-trade risk control used by exchanges EXCEPT which is not?
a. Message throttles
b. Maximum order size
c. Trade cancellation or adjustment policies
d. Price banding mechanism; aka, price collars
504.2. The article by Clark and Ranjan (How Do Exchanges Control the Risk of High Speed Trading ?) summarizes "what was learned during conversations with management at five exchanges that offer equities, futures, and/or options products. The interviews focused on risk controls and other topics of interest or concern to exchange staff." What did the authors find with respect to practices at the exchanges in the case of extreme scenarios?
a. Some exchanges do offer kill buttons; and all five exchanges do offer "cancel on disconnect" but the functionalities/definitions are not standardized
b. No exchanges yet offer kill buttons; but all five exchanges do offer "cancel on disconnect" with functionalities/definitions that are already highly standardized
c. No exchanges yet offer either kill buttons or "cancel on disconnect," but out-of-control algorithms which are identified according to a standardized definition
d. Monitoring for erroneous trades and manipulative market practices via the Intermarket Surveillance Group (ISG) is the best way to thwart order manipulation instantaneously
504.3. Each of the following statements is a conclusion or argument in the article "How Do Exchanges Control the Risk of High Speed Trading?" EXCEPT which is not?
a. Regulators with deep market knowledge and regulations that do not result in unintended consequences or regulatory arbitrage are needed. Otherwise trading firms may migrate to other regions where regulation is less stringent
b. A critical way trading firms monitor their positions in the market is by reconciling the trade report generated on their trading platform with the exchange drop copy; most exchanges provide drop copy in real time
c. One way exchanges can limit firms’ financial exposures is by establishing credit or position limits; however, the fragmented structure of U.S. markets creates challenges in practice
d. Exchange staff asserted that high-speed trading firms do not provide liquidity to markets and were concerned that high-speed trading will mushroom given HFT is novel and has not nearly reached its saturation point
Answers here:
