18 interleaved questions drawn from every lesson in this phase. Interleaving mixes topics on purpose - that difficulty is what builds durable, transferable understanding. Aim for 70%+ before advancing; below that, revisit the flagged lessons.
Q1 EasyUnder price–time priority, a new limit buy order at the current best bid price will:
Execute immediately at the mid
Jump ahead of existing orders at that price
Join the back of the FIFO queue at that price and wait
Cross the spread and pay the ask
Q2 HardGlosten–Milgrom show that a bid–ask spread arises even for a costless, risk-neutral market maker because:
Exchanges mandate a minimum spread
Inventory must be financed
A buy is more likely to come from an informed trader, so \(\E[V\mid buy]\gt \E[V\mid sell]\)
Volatility is always positive
Q3 MediumTemporary market impact differs from permanent impact in that temporary impact:
Persists forever and depends on total size
Decays after you stop trading and depends on your trading rate
Is caused only by exchange fees
Is always larger than permanent impact
Q4 MediumThe central trade-off in the Almgren–Chriss framework is between:
Commissions and taxes
Market impact (from trading fast) and timing risk (from trading slow)
Bid and ask prices
Permanent and temporary impact only
Q5 MediumIn the Avellaneda–Stoikov model, a market maker holding a large long inventory will:
Raise both quotes to buy more
Lower both quotes (reservation price below mid) to sell inventory down
Quote symmetrically around the mid
Stop quoting the bid only
Q6 EasyA backtest that trades using each day’s closing price but assumes execution at that same close exhibits:
Survivorship bias
Look-ahead bias
Data snooping
No bias
Q7 MediumA market buy order for size larger than the best-ask depth will execute at an average price that is:
Equal to the best ask
Equal to the mid
Worse than the best ask, because it walks up through deeper levels
Better than the best ask due to rebates
Q8 EasyWhich is NOT one of the three standard components of the bid–ask spread?
Order-processing cost
Inventory cost
Adverse-selection cost
Dividend cost
Q9 MediumThe empirical square-root law of market impact states that the cost of a metaorder scales approximately as:
Linearly in \(Q\)
\(\propto\sigma\sqrt{Q/V}\), sublinearly in size
Independently of size
\(\propto Q^2\)
Q10 MediumAs the risk-aversion parameter \(\lambda\to0\), the Almgren–Chriss optimal trajectory becomes:
Immediate full liquidation
A straight line - equal slices per interval (TWAP)
Back-loaded to the final interval
Undefined
Q11 MediumAdverse selection reduces a market maker’s profit because:
Exchanges charge informed traders less
Informed counterparties tend to trade on the side that is about to be right, so those fills lose money
It widens the mid-price
It increases rebates
Q12 HardYou test 2,000 zero-edge strategies and pick the best, which shows an impressive in-sample Sharpe. The correct interpretation is:
You found real skill
The best of many noisy trials is expected to look good by chance; it is not evidence
The Sharpe ratio is broken
Survivorship bias caused it
Q13 MediumThe micro-price \((P_aQ_b+P_bQ_a)/(Q_a+Q_b)\) improves on the plain mid because it:
Ignores order sizes
Leans toward the side with heavier opposing depth, predicting the next move
Always equals the last trade
Removes the spread entirely
Q14 MediumRoll’s model infers the spread from trade prices via:
The mean of price changes
The negative first-order autocovariance of price changes, \(s=2\sqrt{-\text{Cov}}\)
The variance of quoted spreads
The correlation with volume
Q15 EasyImplementation shortfall is measured relative to:
The closing price
The volume-weighted average price only
The decision (arrival) price when the order was generated
The next day’s open
Q16 HardIn the exponential solution, the urgency \(\kappa=\sqrt{\lambda\sigma^2/\eta}\) increases when:
Temporary impact \(\eta\) increases
Volatility \(\sigma\) or risk aversion \(\lambda\) increases
Total size \(X\) increases
The horizon \(T\) increases
Q17 HardThe optimal spread term \(\gamma\sigma^2(T-t)\) tells the market maker to:
Quote tighter when volatility rises
Quote wider when volatility or risk aversion rises
Ignore volatility
Quote wider only near the close
Q18 MediumWhich is a legally mandated risk control for firms with direct market access?
A guarantee of positive returns
Pre-trade risk checks and kill switches (SEC market-access rule 15c3-5)
Trading only at the mid
Disclosing all strategy source code publicly