Thursday, March 3, 2011

Trading Rooms Don’t Have to be White Elephants

In 1993, Carnegie Mellon University opened the first educational trading room.  It had live feeds and developed a curriculum called the FAST Program that integrated the resources of the trading room into the curriculum.  We estimate there are approximately 200 educational trading rooms today.  Some are enormously successful, and early examples are in this article from BizEd magazine:

If you have a trading room or finance lab, the question you have to ask is: how does your trading room prepare your students to succeed in financial markets today and in the future?  Today's financial markets are a far cry from 1993.  High frequency trading, program trading, and analytics based trading dominates markets (just Google these terms and you will see the statistics and trends).  If you are using a simulation system, ask yourself: does it have the analytical support and the algorithmic capabilities that help students understand today's markets?  Or the markets as they were in 1993? 
A second question concerns benefits of a trading room/finance lab.  It is unfortunately true that most trading rooms, despite their flashy tickers and high costs, end up being be fancy computer labs with minimal impact on student education or benefiting very limited numbers of students.  Further, as online courses, distance learning courses, and evening and weekend classes expand, relying on access to a centralized facility with limited access becomes problematic.  Even more, while they may have state-of-the-art data resources (Morningstar, Capital IQ, Bloomberg), they don't always have state-of-the-art trading simulations and analytical tools. 

Here are some examples of what you can do with FTS:
  • You can create a live dealing room using the FTS Interactive Markets, where students trade with each other.  They experience what it is like to be in the middle of a live trading floor, where orders are submitted, prices are negotiated, activity is fast paced and competitive, and everyone reacts in real time to the actions of others.  They can learn to build simple (and complex!) support systems in Excel, and even learn how to build algorithmic trading strategies.  
  • You can run a virtual portfolio simulation (the FTS Real Time System), where students manage a portfolio, and trades take place at prices that come from real world exchanges.   Unlike the interactive markets, here there is no market impact (the real world prices don't react to the student activity).   Unlike others, our system has projects and built in analytics so students can learn how they are applied.  One example is our option hedging project: you have to use index options to hedge the risk of an equity portfolio.  You can't use individual stock options (you shouldn't really hedge each stock separately anyway!).  Our system provides portfolio level analytics that make this exercise feasible.  It would be very cumbersome otherwise.   Beyond that, the algorithmic trading capability lets students develop dynamic trading strategies that are impossible in "manual" trading simulations. 
  • Our modules provide ways for students to dig deeper.  The financial statement analysis module lets them understand how to study a company, and compare companies, from first principles.  They can do this at different levels: from the raw company filings or the simpler task of using aggregated statements provided by data vendors such as Morningstar and Compustat (to which many labs have a subscription).  The efficient portfolio module lets them explore statistical properties of portfolio returns as well as learn how mean-variance efficient portfolios are constructed.  Other modules deal with interest rate risk, options, and futures. 

Three questions to ask
o   Do you want a trading simulation with price discovery as well as a virtual portfolio system and supporting analytical modules for one low price?  If the answer is yes, FTS is your only choice.
o   Do you want students to learn how analytics and quantitative techniques are applied in portfolio management?  If the answer is yes, FTS is your only choice.
o   Do you want students to understand how algorithms and high frequency trading have completely changed the nature of financial markets?  If so, FTS is your only choice. 


  1. I think the use of these rooms is improving as more schools are adding them. Over the summer of 2012 we will be part of adding nearly 50 rooms and what that trend shows is we have moved beyond the early adopters into the mainstream users. It is no longer enough for a school to say "I have a room" - the room now has to have a purpose.

    I agree with you that to give the rooms a purpose they need to leverage simulation tools to create a well rounded curriculum.

    So if you are looking to build a room - definitely do your homework but as much as you want to learn about what when right - look for the mistakes others made so you can avoid those pitfalls and get the full exposure out of your room.

    here is a really good recent article that shows some of the growth trends and stats of rooms

  2. To update my last comment we have conducted more research and broken down some of the different factors of the 240+ labs across the US and Canada.

    The stats include size of labs, # of positions, trading analytics used, and simulation programs.

    check them out at