Tuesday, November 20, 2012

Online Courses, Virtual Trading Rooms

I just returned from a conference where there was a panel discussion on university trading rooms. One point of discussion concerned online and distance education: how can students who are not on campus benefit from a trading room? The question becomes even more important given the large increase in online courses; according to the 2010 Sloan Survey of Online Education, online enrollment increased by 21% while overall enrollment increased by only 2%.
A physical trading room is expensive to build and maintain. For example, a 2001 paper by Alexander, Heck, and McElreath (http://www2.stetson.edu/fsr/abstracts/vol_10_num1_p209.pdf) estimated the initial cost to be about $100k. A recent paper by Norton and Kim (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2048506) puts a lower bound of $100k, going up to $500k.  More recent estimates by Rise Vision puts the construction cost of a 30-seat trading room at around $500k and an annual budget of about $75k, and an additional $100k if you have a dedicated lab manager.
The answer to the question is not easy. It obviously depends on why you built the room in the first place and how it is used in the curriculum. 
1. If the trading room is like a library, just a repository of information and data, then the answer is simple: find a way for online students to have access, i.e. build a virtual trading room. Ironically, virtual access is the most difficult with some of the most costly resources in trading rooms, like Bloomberg terminals.
2. If it is integrated into a wide range of courses, then you have no choice but to create a virtual environment. By “integrated” I mean that professors regularly use the resources in their courses, for example to conduct trading simulations, assign projects utilizing the data resources, and so on. In this case, you also have to provide a way for students to learn to use the resources without necessarily having access to a person for help.
In our case, we have been working on creating usable technology for virtual trading rooms for almost two decades. When I was at CMU, we built a trading room in the early 1990’s, called the FAST Lab. It had live data feeds, data servers, etc. We had about 25 seats. We learned several things very quickly.
First, having the data, such as real time quotes, is not useful unless you developed educational tools to do something with it. This led to what is now the FTS Real Time System. Our goal here was, and remains, providing a set of tools so students can learn concepts, their practical application, and their usefulness. It is not “teach trading” or “stock picking.” Our teaching guide therefore contains a series of projects that students can conduct that help them understand risk and return, portfolio diversification, duration and bond immunization, how to use the option Greeks to hedge, how to apply valuation models, and so on. It provides a tight integration of theory and practice.
Second, we learned a lot about complexity. Putting a student into a trading room with all the “latest whatever” is like putting a drivers ed student into a formula 1 racing car and asking them to drive it at 200 mph. You have to step them up to that. Hence our effort on online textbooks, application guides, and so on. Our Financial Statement Analysis module is the latest in this series, and provides a structured, step-by-step way for students to learn financial statement analysis and conduct fundamental analysis. You can combine it with a trading exercise, but that is not necessary. As part of the module, we also provide quick and easy access to financial reports, so students don’t have to spend hours downloading data and copying and pasting; Excel skills are still needed, but for developing higher level skills, not the mechanics of data collection.
Third, we learned about access. Students tend not to work around a 9-5 schedule, and their needs depend critically on when something is due. So a room with 25 seats is totally inadequate if 300 students in core investments courses have a project that is due, and they all want to work on it at 1 am. So you have to provide distributed access. You also can’t do many other things with a limited number of seats. For example, the FTS Interactive Market is a trading simulation where students trade with each other. While the trading is organized around cases that reinforce conceptual understanding, students experience many things, such as market impact and liquidity, that are difficult to teach in a textbook and that cannot be experienced by simulations where they trade against the tape. If you want to use this in a class of 45 students, a 25 set room is limiting. So again, our application is accessible anywhere there is an Internet connection.
Anyway, we had a physical trading room for a few years, and then moved entirely to a virtual trading room. This also meant that when we expanded distance education and wanted to use these resources (for example, in the computational finance classroom in New York City), it was easy to expand. 
When writing this, I recalled an article published by the AACSB in 2003 that discussed may of the issues that we continue to discuss today. You can find a copy at http://gtf.mcmaster.ca/reports/p22-27.pdf    Many of the issues remain the same as what we discussed almost a decade ago.