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

3. Agenda 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 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

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

7. Mathematical finance… • 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.

8. The Derivatives Market

9. What is a Derivative? • 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 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? • Hedging • Speculating • Arbitrage • Access Remote Markets

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

13. Derivative Markets • 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 • 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 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 • 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 • 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

19. END SESSION 1