Monday, May 27, 2013

Building Practical and Analytical Skills

Analytical skills are critical in today’s world, specially in areas like finance and accounting.  Trading simulations can be very effective in building these skills for a large base of students.  They have the inherent motivational advantage of being competitive, and the simulations can show students how analysis gives you an advantage and also what trading means in today's markets. 
Both our trading systems accomplish this goal:
  • Interactive trading simulations with price discovery
    • In this trading simulation, students trade securities with the each other; they experience market impact, liquidity, real-time reactions to the strategies of others, and so on.  But they can also prepare strategies to help them, as summarized in the following PDF file: Student Case Preparation Manual
      • The manual shows students how to model securities,value them in Excel, and use them to guide trading decisions.  They can use Excel formulas as well as VBA macros.  They can even develop automated trading algorithms and see how they algorithm competes against others.
    • Beyond that, they can build automated trading strategies in Excel and see how their strategy performs against others. 
  • Virtual trading simulations of real world securities
    • Here, students trade “against the tape,” i.e. they trade securities at prices that come from real world exchanges, but these are paper trades so they have no market impact.  Our approach is summarized in these projects.
    • The projects take them from simple calculations (e.g. how to calculate performance measures) to intermediate calculations (how to use Solver in Excel to create a diversified portfolio) to this comprehensive value investing project that combines stock selection strategies with financial statement analysis, and valuation.
    • With derivatives, the analytics come into their own.  I particularly like this option hedging project, where you have to hedge the risk of a broad equity portfolio using only index options and futures (since you want to hedge the portfolio, not individual securities).  The technique they use (described in the project) is to use beta-weighted delta’s to manage risk. 
      • This is one place where FTS shines.  Without the real time analytics, managing portfolio risk becomes a very difficult task.  Imagine calculating all the implied volatilities, the option hedge parameters, and the basis risk manually in Excel every few seconds!
    • The algorithmic trading capability here is also very powerful.  It lets students develop real-time trading algorithms.  This lets them implement strategies that are close to impossible otherwise, such as optimal trade execution, basket or portfolio trades, and any type of dynamic trading exercise that requires continuous monitoring of markets.
      •  This is where FTS differs from other simulations.  Some offer more stocks that can be traded, but without tools that let you develop trading strategies, you are left with what you could do in the 1990's. 
    • Our instructor support and student feedback is second to none
      • Instructors have complete access to the entire history and performance of every student at any time
      • Student reports include detailed profit and loss reports on every trade as well as the usual measures of portfolio performance
Students can use tools such as our financial statement analysis module to build analytical depth,   One feature of this module is that it lets students work from first principles: they learn to be a true analyst, not just a consumer of other peoples research, by working with raw company filings and learning how to analyze and compare companies.  The software makes it easy to study several companies.  One really useful feature is that you can compare your calculations from those of financial data providers; this teaches you what assumptions they make, how they aggregate fields, and what they miss.