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. 

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TURNING UP THE HEAT

The FTS Heat Maps are a powerful way to visualize the performance of stocks based on different criteria and over different time periods. They are accessed through the Heat Maps tab and are currently available for the US Equity cases (and will be extended to other countries soon):

This picture shows the performance of stocks, over the past month, sorted by beta. So TRIP has the highest beta among the stocks in the case, SHLD has the second, and so on. If you move your mouse over a box, you will see the full name of the company and its beta. So by scrolling, you can quickly see how high beta stocks are performing relative to low beta stocks.

You can also view this by deciles. In decile analysis, we divide the data into ten parts: the top 10%, the next 10%, and so on. So Decile 1 in the picture below shows you the average performance of the 10% of stocks that have the highest beta within the set of stocks in the case. You can see that over the last 3 months, higher beta stocks have performed better than lower beta stocks:

You can change the timer period using the drop down; during the day, when markets are open, you can see today’s performance as well.

The tree on the left shows you the different sorting capabilities. For example, you could sort by sector. Then, you would see how stocks in sector are performing; they would be shown within that sector:

You can see that AES belongs to the “Basic Industries” sector. You can also see that the next sector (“Capital Goods”) starts with the company whose ticker is A; holding your mouse over the box tells you the sector name.

You can also see how sectors have performed by selecting Sector averages:

We have provided specific dimensions along which you sort or categorize stocks, and these are based both on practice and on what the academic research literature has identified as being potentially important ways to understand stock returns, for example the book value. The sector industry maps, over time, help with sector rotation strategies. Sorting by your position can show you how your long positions are performing relative to your short positions if you are following a long-short strategy.

Creating Real Time Simulations With Your Data Feed

As you know, FTS runs a variety of real time cases based around our teaching guide.  You may not know that if you have a data feed, you can run your own trading simulations using our real time system.  I realized that we had not written much about this capability just the other day, when we were helping a school with Reuter’s data feeds implement their own simulation.

There are quite a few trading rooms that subscribe to real time data from a variety of exchanges.  Even if the data vendor provides a mock trading platform, they are not set up for instructors.  For example, it can be hard to monitor student portfolios and calculate relative performance for a class, and these tools typically don’t provide a structured series of exercise to guide student learning.

The FTS RT Server solves this problem.  All the cases we run use this server.  You have to create the simulation, and this is done in an Excel workbook.  You specify the trading names and passwords, what can be traded, who can trade what, and so on.  We have also greatly simplified the connection to the data feed: all you have to do is bring the real time data into the Excel workbook.  This serves as a generic interface, and can handle quite a large amount of data; every data feed we have encountered in a trading room has a utility that downloads quotes into Excel. 

Students use the FTS Real Time Client to connect to the server, and then it works just as with the simulations we run.  Instructors have the support required, described, for example, here. 

If you are interested in this solution, please contact us; we will be happy to show you and your trading room staff how to create real time simulations with your own real time data feed.