lerc algorithmic trading project 1 purpose: give loyola undergraduates a means to learn, research,...

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LERC ALGORITHMIC TRADING PROJECT

Purpose: Give Loyola undergraduates a means to learn, research, and develop their own algorithmic trading strategies and implement them in a competitive setting. We want to prepare and market students for the modern financial market world.

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LERC ALGORITHMIC TRADING PROJECT

Automated/Algorithmic trading is the process where trading ideas are turned into mathematical models and coded into computer programs for systematic trading.

http://www.youtube.com/watch?v=aybe7iVHJ7E

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Agenda

Education

Session 1: Industry Introduction and Derivatives OverviewSession 2: Evolution of Financial Markets and Market Microstructure Session 3: Prerequisites for Algorithmic Trading System (ATS) Development and Selecting a PlatformSession 4: Review of the Scientific Method and the ATS Development ProcessSession 5: Formulation and Specification of a StrategySession 6: Backtesting and OptimizationSession 7: Implementation / Risk Management

Research

Session 1: WorkshopSession 2 Workshop

Competition - 2 weeks (10 days)

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Agenda

70% attendance + Submitting a Strategy Into the Competition =

Certificate of Completion

You do well in the competition or you show promise as an algorithmic trader? You will get an offer.

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Session 1: Industry Introduction and Derivatives Overview

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Let’s look at some job descriptions…

http://www.quantfinancejobs.com/jobs/quant-strategist.asp

http://www.analyticrecruiting.com/list_job.asp?job_id=17880&category=o5&title=Senior%2BAlgorithmic%2BTrading%2BQuant&JobKeywords=&JobCategories=Derivatives%2FFutures%2FFX%2B%26%2BStructured%2BTransactions%2C%2BQuantitative%2BFinance%2FFinancial%2BEn

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Mathematical finance…

http://www.youtube.com/watch?v=CE5pB5H1RJQ

We want to make money. But also, many people in this field are discovering (at least to some degree) insights into fundamental nature.

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The Derivatives Market

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What is a Derivative?

A contract that specifies the rights and obligations between two parties to receive or deliver future cash flows (or an exchange of other securities or assets) based on some future event.

They derive their value from the underlying asset class

For example, S&P 500 Futures, Corn Futures, IBM Call Options, Microsoft Put Options

Important to understand underlying asset class before using derivatives

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Derivative vs Non-Derivative: LeverageLeverage can be created through

options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10.

Derivatives – More bang for buck (for better or worse). They are not for everyone.

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Why are Derivative Used?

Hedging

Speculating

Arbitrage

Access Remote Markets

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Two Types

Linear -Forwards -Futures -Swaps (generally)

Non-Linear -Vanilla/Exotic Options -Warrants -Credit Default Swaps

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Derivative Markets

Asset classes include interest rates, foreign exchange, equities, credit, commodities, weather, freight routes, energy, emissions, property

Can be Exchange-Traded or OTC (Over-the-counter)

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Exchange-Traded Derivatives

US Equity options- CBOE (1973)- Amex- P-Coast- Philly- ISE- BOX

US Futures- CME (1874)- CBOT (1848)- NYMEX- NYBOT- KCBOT- MGE

…

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Exchange-Traded DerivativesOpen Outcry

Traditional method of public auction for making bids and offers in the trading pits of the exchange.

Involves shouting and the use of hand

signals to communicate information about buy and sell orders

http://www.youtube.com/watch?v=S43zvtdJcxI

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Electronic Trading

Brings together buyers and sellers through an electronic trading platform to create a virtual marketplace known as an electronic communication network (ECN). Example - CME’s Globex.

Implications: Reduced cost of transactions, greater liquidity, increased competition, higher transparency, and tighter spreads.

Has led to a growth in algorithmic trading (covered later).

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OTC Derivatives Market

Off-exchange derivatives market. Market can be accessed via special electronic crossing networks or direct contact between market participants.

Usually used by traders/treasurers/fund managers of financial institutions

Dark liquidity pools: Liquidity that is not openly available to the market.

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OTC Derivatives Market

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END SESSION 1