HFT & Advanced Concepts

Q1. (4 marks)

• Definition (2): HFT is a form of algorithmic trading characterised by extremely high speeds, high order-to-trade ratios, and very short holding periods, using computers to execute large numbers of orders in fractions of a second.
• Characteristics (1 each, any two): ultra-low latency; co-located servers; very short holding periods; high message/cancellation rates; proprietary capital; end-of-day flat positions.

Q2. (5 marks)

• Role (2): A market maker continuously posts both bid (buy) and ask (sell) quotes, providing liquidity and profiting from the spread while managing inventory risk.
• Formula (1): $\text{Spread} = \text{Ask} - \text{Bid}$
• Calculation (2): \text{Spread} = 100.14 - 100.10 = \0.04$ (4 cents).

Q3. (5 marks)

• Definition (3): Latency arbitrage is a strategy exploiting tiny time differences in the arrival of price information between venues, allowing a faster trader to act on a price before slower participants observe the update.
• Mechanism (2): If exchange A updates a price before exchange B, a fast trader who sees A's move first can buy/sell the stale quote on B and profit from the price convergence, before B's quote adjusts.

Q4. (6 marks)

• Colocation (2): Placing the firm's servers physically inside or adjacent to the exchange's data centre to minimise signal travel time (latency).
• DMA (2): Direct Market Access lets a trader send orders directly to the exchange order book without routing through a broker's trading desk.
• Benefits (1 each): Colocation → lowest possible latency / speed advantage; DMA → faster execution and greater control over order handling.

Q5. (5 marks)

• Function (3): A Smart Order Router automatically decides where and how to send orders across multiple trading venues to achieve best execution (best price, fill probability, lowest cost).
• Factors (1 each, any two): price/quotes at each venue; available liquidity/depth; venue fees & rebates; latency; fill probability; market impact.

Q6. (5 marks)

• Concerns (2 each, any two): contributing to flash crashes/instability; unfair speed advantage over retail investors; increased quote stuffing/spoofing; systemic risk; reduced market fairness/transparency.
• Measure (1): Circuit breakers; minimum resting times; transaction taxes; order-to-trade ratio limits; enhanced surveillance.

Q7. (6 marks)

• Flash crash (2): A very rapid, deep, and usually brief collapse in security prices, often driven/amplified by automated trading, followed by a swift partial recovery.
• Circuit breaker (2): A regulatory mechanism that halts or slows trading when prices move beyond preset thresholds, giving markets time to stabilise and restore orderly trading.
• Calculation (2): Additional decline $= 13\% - 7\% = 6\%$.

Q8. (6 marks)

• Definition (2): TWAP executes an order evenly over a set time period, targeting the average price across equal time intervals, minimising timing bias.
• Slices (2): $\dfrac{4 \text{ hours} \times 60}{15} = \dfrac{240}{15} = 16$ slices.
• Shares per slice (2): $\dfrac{12{,}000}{16} = 750$ shares per slice.

Q9. (8 marks)

• Formula (2): $\text{VWAP} = \dfrac{\sum (P_i \times V_i)}{\sum V_i}$
• Numerator (3): $(50)(100) + (52)(300) + (51)(200) + (53)(400)$ $= 5000 + 15600 + 10200 + 21200 = 52000$
• Denominator (1): $100 + 300 + 200 + 400 = 1000$
• Result (2): \text{VWAP} = \dfrac{52000}{1000} = \52.00$

[
  {"claim":"Bid-ask spread = 0.04","code":"result = (Rational('100.14') - Rational('100.10')) == Rational('4','100')"},
  {"claim":"Circuit breaker additional decline = 6%","code":"result = (13 - 7) == 6"},
  {"claim":"TWAP slices = 16 and shares per slice = 750","code":"slices = (4*60)//15; result = (slices == 16) and (12000//slices == 750)"},
  {"claim":"VWAP = 52.00","code":"num = 50*100 + 52*300 + 51*200 + 53*400; den = 100+300+200+400; result = Rational(num,den) == 52"}
]