Trading
What the exam tests
Trading tests execution: quote conventions, order types, market making, electronic venues, last look and the trade lifecycle from execution to settlement. It rewards candidates who can reason about execution quality and the incentives of each party.
Core concepts
- Quotes. A two-way price is bid/offer; the spread compensates the liquidity provider for risk and adverse selection. Pips and big figures must be read correctly.
- Orders. Market orders prioritise speed; limit orders prioritise price but may not fill; stop orders become market orders when triggered; iceberg orders hide size.
- Venues and protocols. Voice, RFQ, central limit order books and streaming prices differ in pre- and post-trade transparency.
- Last look. An FX liquidity provider may hold an order briefly and reject it. The optionality sits with the provider; disclosure and best-execution obligations constrain its use.
- Lifecycle. Execution, confirmation, clearing and settlement. Straight-through processing reduces operational risk; T+2 is common for FX and many securities, but not universal.
Worked example
A client sends a EUR 20 million EUR/USD order to a liquidity provider. The provider holds the order for 30 milliseconds, the market moves 1.5 pips against the client, and the provider rejects it. The client then executes 1.5 pips worse.
Reasoning: the client's implicit cost is 20,000,000 x 0.00015 = USD 3,000. Last look transfers an option to the provider. Whether this is acceptable depends on disclosure, the client's agreement and best-execution rules; repeated rejections when the market moves against the provider are a conduct red flag. TCA should separate spread, slippage and rejection costs.
Traps
- Equating best execution with the best quoted price; speed, likelihood of execution and cost also matter.
- Assuming a limit order guarantees a fill.
- Ignoring benchmark conventions, such as which fix and which time window apply.
- Treating T+2 as a universal settlement cycle.