Lecture quizzes

Question 1

Which of the following traders profit from knowing the fundamental values of assets?

Answer 1

Informed traders

Question 2

Which market participants trade to make profits?

Answer 2

Front runners

Question 3

What are the implications of incorporating the cost of acquiring and acting on information in our thinking of market efficiency?

Answer 3

Markets can be more informationally efficient if they cost of acquiring information is low

Question 4

Noise traders

Answer 4

• trade on information that they falsely believe to be special information
• noise traders include inefficient traders who fail in their trading strategies

Question 5

How would informed traders profit from their trading?

Answer 5

• they trade when the prices differ from the fundamental underlying value of the assets
• they profit when prices revert to the fundamental value

Question 6

What are the objectives of capital markets?

Answer 6

• capital markets are necessary for economic growth and development as it facilities capital allocation
• capital markets facilitate the price discovery for assets through the interaction of buyers and sellers

Question 7

What is buy side of the trading industry?

Answer 7

• they include individuals, funds, firms and government that use the markets to help solve various problems they face

Question 8

What is a property of limit orders?

Answer 8

• standing limit orders provide liquidity

limit orders NOT always executed

Question 9

What traders trade for reasons other than for generating a profit?

Answer 9

• hedgers

NOT DEALERS

Question 10

What auction method does not provide a transparent price discovery process?

Answer 10

• first price sealed-bid auction

Question 11

Markets that report quotes are?

Markets that report trades when they are executed are?

Answer 11

• ex ante transparent

- ex post transparent

Question 12

What instruments are best suited for brokered markets?

Answer 12

• illiquid instruments

NOT instruments that generate a lot of interest

Question 13

First rule used in single price auction to determine opening price is:

Answer 13

• maximizing the volume traded

Question 14

Price priority rule gives precedence to?

Answer 14

The bidder with the highest bid

Question 15

What markets use the derivative pricing rule?

Answer 15

Crossing networks

Question 16

Why might institutional traders use iceberg orders?

Answer 16

• to minimise trading costs

Question 17

Black 1971 suggests stock liquid when:

Answer 17

• there is a bid and ask price to trade against when trading a small amount of stock

NOT when difference between bid and ask price is large

Question 18

Institutional traders prefer less ex ante transparency because:

Answer 18

• informational advantage is not given away to others such as day traders and hedge funds
• minimises trading costs

Question 19

Algorithmic trading refers to:

Answer 19

• the automatic placement of orders in response to live market data
• the use of algorithmic trading sees orders spread over different markets and/or over time

Question 20

Chan and Lokoniskok 1993 note during buy/sell trades:

Answer 20

buy orders see much larger upward effect than the downward effect by sell orders