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CFA Level 2
Equity Investments

Algorithmic Trading and Machine Learning

Medium Equity Market Structure Algorithmic Trading

In the context of modern equity markets, algorithmic trading has significantly influenced the dynamics of liquidity and price discovery. Consider a large institutional investor known for executing block trades, which often has a substantial impact on stock prices due to the size of their trades. As a result, they have begun employing algorithmic trading strategies to minimize market impact and enhance execution efficiency.

This institutional investor has adopted a specific algorithm that adjusts its trading strategy based on real-time market conditions and sentiment. The algorithm's objective is to make trades that are less visible to the market, thereby reducing the likelihood of front-running by other market participants. The investor is evaluating the adoption of a new algorithm that incorporates machine-learning techniques to analyze historical data and predict price movements more accurately.

Which of the following statements best describes a potential advantage of using such machine-learning driven algorithms in algorithmic trading?

Hint

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