1. LERC ALGORITHMIC TRADING PROJECT 1 Purpose: Give Loyola undergraduates a means to learn, research, and develop their own algorithmic trading strategies and implement them in a competitive setting. We want to prepare and market students for the modern financial market world.

2. LERC ALGORITHMIC TRADING PROJECT 2 Automated/Algorithmic trading is the process where trading ideas are turned into mathematical models and coded into computer programs for systematic trading. http://www.youtube.com/watch?v=aybe7iVHJ7E

3. Agenda 3 Education Session 1: Industry Introduction and Derivatives Overview Session 2: Evolution of Financial Markets and Market Microstructure Session 3: Prerequisites for Algorithmic Trading System (ATS) Development and Selecting a Platform Session 4: Review of the Scientific Method and the ATS Development Process Session 5: Formulation and Specification of a Strategy Session 6: Backtesting and Optimization Session 7: Implementation / Risk Management Research Session 1: Workshop Session 2 Workshop Competition - 2 weeks (10 days)

4. Agenda 4 70% attendance + Submitting a Strategy Into the Competition = Certificate of Completion You do well in the competition or you show promise as an algorithmic trader? You will get an offer.

5. Session 1: Industry Introduction and Derivatives Overview 5

6. Let’s look at some job descriptions…  http://www.quantfinancejobs.com/jobs/quant- strategist.asp http://www.quantfinancejobs.com/jobs/quant- strategist.asp  http://www.analyticrecruiting.com/list_job.asp?job_id =17880&category=o5&title=Senior%2BAlgorithmic%2 BTrading%2BQuant&JobKeywords=&JobCategories=D erivatives%2FFutures%2FFX%2B%26%2BStructured% 2BTransactions%2C%2BQuantitative%2BFinance%2F Financial%2BEn 6

7. Mathematical finance…  http://www.youtube.com/watch?v=CE5pB5H1RJQ http://www.youtube.com/watch?v=CE5pB5H1RJQ  We want to make money. But also, many people in this field are discovering (at least to some degree) insights into fundamental nature. 7

8. The Derivatives Market 8

9. What is a Derivative? 9  A contract that specifies the rights and obligations between two parties to receive or deliver future cash flows (or an exchange of other securities or assets) based on some future event.  They derive their value from the underlying asset class  For example, S&P 500 Futures, Corn Futures, IBM Call Options, Microsoft Put Options  Important to understand underlying asset class before using derivatives

10. Derivative vs Non-Derivative: Leverage 10 Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10. Derivatives – More bang for buck (for better or worse). They are not for everyone.

11. Why are Derivative Used? 11  Hedging  Speculating  Arbitrage  Access Remote Markets

12. Two Types 12  Linear  -Forwards  -Futures  -Swaps (generally)  Non-Linear  -Vanilla/Exotic Options  -Warrants  -Credit Default Swaps

13. Derivative Markets 13  Asset classes include interest rates, foreign exchange, equities, credit, commodities, weather, freight routes, energy, emissions, property  Can be Exchange-Traded or OTC (Over-the-counter)

14. Exchange-Traded Derivatives 14  US Equity options - CBOE (1973) - Amex - P-Coast - Philly - ISE - BOX  US Futures -CME (1874) -CBOT (1848) -NYMEX -NYBOT -KCBOT -MGE …

15. Exchange-Traded Derivatives 15 Open Outcry  Traditional method of public auction for making bids and offers in the trading pits of the exchange.  Involves shouting and the use of hand signals to communicate information about buy and sell orders http://www.youtube.com/watch?v=S43zvtdJcxI

16. Electronic Trading 16  Brings together buyers and sellers through an electronic trading platform to create a virtual marketplace known as an electronic communication network (ECN). Example - CME’s Globex.  Implications: Reduced cost of transactions, greater liquidity, increased competition, higher transparency, and tighter spreads.  Has led to a growth in algorithmic trading (covered later).

17. OTC Derivatives Market 17  Off-exchange derivatives market. Market can be accessed via special electronic crossing networks or direct contact between market participants.  Usually used by traders/treasurers/fund managers of financial institutions  Dark liquidity pools: Liquidity that is not openly available to the market.

18. OTC Derivatives Market 18

19. END SESSION 1 19