Markets and trading
Markets and trading tests market structure, order types, execution quality, and the link between trading decisions and client outcomes. Questions often combine a short order-book or benchmark calculation with a conduct issue.
Market structure and order types
- A limit order sets a maximum buy price or minimum sell price and may rest in the book; a market order demands immediate execution and takes liquidity.
- Price-time priority is common in lit order books. Dark pools and RFQ venues trade off pre-trade transparency for size and price improvement.
- Best execution is not simply best price: venue, speed, likelihood of execution, size, and costs matter.
Execution quality
Measure slippage against arrival price, VWAP, or implementation shortfall. T+1 settlement compresses the post-trade window but does not change the economics of execution.
Worked example
An order book shows bid 99.98 for 500 shares, ask 100.02 for 300 shares, and next ask 100.03 for 400 shares. A market buy for 500 shares fills 300 at 100.02 and 200 at 100.03. Cost = 300 × 100.02 + 200 × 100.03 = 30,006 + 20,006 = 50,012; average price = 100.024. The 0.004 per-share slippage versus the best ask is the immediate cost of demanding liquidity.
Traps
Treating a limit order as guaranteed; ignoring depth beyond the top of book; measuring execution only against the closing price; confusing gross and net consideration; forgetting that a market order can walk the book.