Introduction to Exchanges Chris Welty Walleye Trading.

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Presentation transcript:

Introduction to Exchanges Chris Welty Walleye Trading

Who is this guy?

Walleye Trading Hedge fund in Wayzata Quantitative focus ~35 employees

Exchanges What they are Growth Quantitative Finance

History 1602 Amsterdam Stock Exchange 1730 Dojima Rice Exchange 1973 Chicago Board Options Exchange

Why trade on an exchange? Standardization Liquidity Information Credit Efficiency

Executing a trade

Increasing Computerization

Match Buyers and Sellers

Who Does What CustomerBrokerExchange Market Maker

Broker Accepts orders Executes orders Custodian Credit intermediation

Market Maker Provide prices Provide liquidity Sometimes, stabilize market

Market Stabilization NYSE Specialist Japanese Price limits Position limits

Increasing Quantitative Trading Stocks Foreign Exchange Futures Options

Leads to massive growth

NYSE Volume

Market Growth Reduced commissions Penny pricing Quantitative trading

Quantitative Finance Option Modeling Automated Trading

Black-Scholes Model Useful Not Practical

Black-Scholes Price

Black-Scholes Delta

Gamma

Rho (interest rate risk)

Model Enhancements Discrete dividends Different interest rates Variable volatility Smile Term structure Proprietary

Automated Trading Algorithmic Execution Low-Frequency High-frequency

Algorithmic Execution VWAP Minimize trading cost Reduce information leakage

Low Frequency Trading Statistical Arbitrage Quantitative-based fundamental trading

High Frequency Trading Hot new area Enabled by electronic trading Analysis of large data sets

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