NYU Stern School of Business

Undergraduate College

MULT-UB.0035.001 (C70.0035): TRADING STRATEGIES AND SYSTEMS

Spring 2013

Instructor Details

Dhar, Vasant

vdhar@stern.nyu.edu

(212) 998-0816

Tuesdays 4-6pm

KMC 8-97


Preferred Communication: email and telephone

URL: www.stern.nyu.edu/~vdhar

 

Course Meetings

T, 6:00pm to 9:00pm

Tisch T-200


Final Exam:

Schedule exceptions
    Class will not meet on:
    Class will meet on:

 

Course Description and Learning Goals

COURSE SYNOPSIS
As financial markets become more electronic and more liquid, a higher degree of knowledge about analytics and systems is required in order to compete. This course teaches students how modern financial markets function and how to use the information emanating from these markets for decision making,
specifically how to build and implement systematic computer-based models for trading.

The course covers the basis, evaluation and execution of trading strategies that are commonly used by professionals in financial markets. There is increasing interest in particular, on systematic trading strategies and execution systems because of their consistency in decision making, their transparency, and scalability. The central objective of this course is to understand the essence of systematic trading, key elements of which are the basis for generation of “alpha,” and how to think about and control the various types of risks associated with systematic trading systems.

The course strikes a balance between theory and practice by grounding the discussion in the current state of financial markets. Senior portfolio managers from industry are invited to class periodically, and students are encouraged to make the most of these visits. The course requires students to do several hands-on
exercises with real market data. The exercises start with a review of simple concepts of risk and return and progress to simple trading strategies that students build and evaluate. The objective is to help you understand how to assess markets in an orderly and scientific way so as to be able to draw sound inferences
from the analysis.

The course should be of interest to students across the financial services industry. It will not transform you into a trading expert, which takes considerable effort, time, and pain. It will, however, bring the concepts of risk and return alive by working with real data and exercises, and through industry experts describing their approach to fund management and administration. More generally, the course should give you a clearer appreciation on the fact that understanding markets is a theory building exercise, where professionals spend a lot of time in understanding emerging market phenomena with the objective of translating their insights into profitable strategies. These concepts are useful regardless of your specific interest in the financial industry, i.e. whether you intend to be a trader, risk manager, controller, salesperson, or analyst.

Self learning is a particularly important part of this course. You will get the best value from this course if you experiment actively with ideas and actively construct and test trading strategies instead of just coming to class and expecting to be told what works and what doesn’t. There’s nothing like learning by doing.

Accordingly, 50% of the grade is assigned to your project. So, start early. Exploratory work always takes longer than you think. Indeed, your very first assignment is to write a 1-2 page summary of what you might do as your project. Even if you end up changing topics, the exercise will help you get started in thinking about it seriously, before you get into the nitty-gritty of the quantitative exercises.

There are two main learning goals associated with this course. The first is critical thinking. Specifically, how do you transform a trading idea into a concrete description that can be described and modeled quantitatively, in this case using spreadsheets. The spreadsheets from the various assignments are usable as “templates” for developing more advanced strategies. In addition to translating an idea into a model, students will learn how to draw and assess conclusions from the model and data provided. The second goal is effective communication of an idea, quantitatively, in writing, and verbally.

 

Course Outline

 TIMETABLE
(Feb 08 to May 03 2011):
(Subject to slight revisions)

Session Topic Readings (posted on BB) Submission Due
1 Introduction and Course Objectives                                                                 None                                    None
2                                                  Markets and basic measurements of performance, direction and volatility
How to compare strategies
Assignment 1 handed out
Life at Sharpe’s End
BOC Theory: Chapter 1
Assignment 0: BRING LAPTOPS
TO CLASS!!!
In Class Exercise
Assignment 0:
Basic Measurement
3 Technical trading: Trend
Following Systems & Futures
Markets
Assignment 2 handed out
Reading: Kauffman
Chapter 8
Assignment 1:
Volatility
Due 6pm                                           
4 Technical trading: Trend and
Counter-trend systems
Assignment 3 handed out
Reading: website link Assignment 2:
Trend Following
Due 6pm
5 Technical trading: Spreads and
pairs trading in Equities Markets
Assignment 4 handed out
Reading on Spreads and Arbitrage
on BB
Assignment 3:
Counter-trend
Due 6pm
6 Pairs trading review;
Fundamentals and currency
trading strategies
Assignment 5 handed out
Readings:
Battle of the Dollar;
FX Guide
 
7 INDUSTRY PERSPECTIVE:
Guest speaker from SAC Capital
TBD Assignment 4:
Spread-Based Pairs Trading
Due 1/18 @5pm
8 Currencies and carry trades;
Cointegration and basket trading
Assignment 6 handed out
FX Guide  
9 News-based Trading Systems Chapter 15 from High Frequency
and Algorithmic Trading
Late breaking articles on BB
Assignment 5:
FX Basic Balance
Due 6pm
10 INDUSTRY PERSPECTIVE:
Guest speaker from ROC Capital
TBD  
11 High frequency trading High_Frequency_Trading
reading
Assignment 6:
FX: Carry & Others
Due 6pm
12 Recap and Summary
Selected Student Project
Presentations
N/A  



 

Required Course Materials

COURSE MATERIALS
There is no required textbook for this course. However, the following, relatively recent book, describes at a high level the basis for quantitative trading strategies:

Inside the Glass Box: The Simple Truth About Quantitative Trading, Rishi Narang, 2009

For those students wanting details on market indicators and measurement, a useful textbook is:

New Trading Systems and Methods, Perry Kaufman, Wiley 2005

The above textbook is biased towards practice at the expense of theory and it has detailed descriptions of market indicators and methods, which makes it a good reference. It is not mathematically rigorous, but useful in helping you think about measurement issues with time series data, commonly used types of indicators to describe states of markets, and vanilla models from which portfolio managers build more elaborate strategies.

A set of current readings will be posted on Blackboard. In addition to these readings, the course will provide datasets that will be used for the assignments. The assignments are simple, and intended to serve as a foundation for thinking about more sophisticated trading strategies you might build going forward. In
order to keep the material accessible, all examples are illustrated in Excel.

The articles used in the course include (but are not limited to) the following:

  1. Life at Sharpe’s End: covers performance measurement, especially the Sharpe Ratio and its imitations
  2. BARRA on Campus: provides a general overview of risk and its measurement
  3. Reconciling the Structural Forces on the Dollar, DB Research Report: provides a macroeconomic basis for trading currencies
  4. DB Guide to FX Trading: provides the various approaches to currency trading strategies at various time frames
  5. Interview with William Eckhardt, from The New Market Wizards: talks about the statistical assumptions about market behavior that underlie trading strategies, the validity of these assumptions, and the implications when they don’t hold
  6. Article on high frequency trading
  7. Articles summarizing news-based trading approaches

Since one of the main objectives of the course is to provide you with hands-on skills in developing and
understanding trading strategies, several datasets are provided including the following:

  1. Daily S&P500 cash data 1960-2005
  2. Daily data for selected currency, fixed income, equity futures, and commodity futures
  3. Fundamentals (Trade Balance) data for currencies (aligned with the dollar index)
  4. Fundamentals-based aggregated equities data
  5. Equities data for spread-based (pairs) trading

All materials (except for late breaking articles and non-electronic information) are posted on the class website. Students are also encouraged to explore the Internet for materials relevant to the course.

 

Assessment Components

REQUIREMENTS AND EVALUATION
Since this is a hands-on course, there are several small assignments involving data analysis. You must have reasonable Excel skills to do these assignments. There are up to six such assignments. You must also participate in class discussion and come prepared to present your analyses to the class. Each class where an assignment is due will begin with several students at random being chosen to present their results.

In addition, you must hand in a term paper describing a complete trading strategy. It is preferable if this strategy is demonstrated using data and analysis, but conceptual analyses are also acceptable. Examples of things you could explore are:

There is no final exam. The grade breakdown is as follows.

   i.     Assignments: 50 points
  ii.     Term paper on a trading strategy: 40 points
 iii.     Class participation and attendance: 10 points

 

Group Projects

Guidelines for Group Projects

Business activities involve group effort. Consequently, learning how to work effectively in a group is a critical part of your business education.

Every member is expected to carry an equal share of the group’s workload. As such, it is in your interest to be involved in all aspects of the project. Even if you divide the work rather than work on each piece together, you are still responsible for each part. The group project will be graded as a whole:   its different components will not be graded separately. Your exams may contain questions that are based on aspects of your group projects.

It is recommended that each group establish ground rules early in the process to facilitate your joint work including a problem-solving process for handling conflicts. In the infrequent case where you believe that a group member is not carrying out his or her fair share of work, you are urged not to permit problems to develop to a point where they become serious. If you cannot resolve conflicts internally after your best efforts, they should be brought to my attention and I will work with you to find a resolution.

You will be asked to complete a peer evaluation form to evaluate the contribution of each of your group members (including your own contribution) at the conclusion of each project. If there is consensus that a group member did not contribute a fair share of work to the project, I will consider this feedback during grading.

 

Grading

At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, students in undergraduate core courses can expect a grading distribution where: 

Note that while the School uses these ranges  as a guide, the actual distribution for this course and your own grade will depend upon how well  you actually perform in this course.

 

Re-Grading

The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.

If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.

 

Professional Responsibilities For This Course

Attendance

 

Participation

In-class contribution is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance.
You can excel in this area if you come to class on time and contribute to the course by:

 

Assignments

 

Classroom Norms

 

Stern Policies

General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior.  Students who fail to do so may be asked to leave the classroom. 

 

Collaboration on Graded Assignments
Students may not work together on graded assignment unless the instructor gives express permission. 

 

Course Evaluations
Course evaluations are important to us and to students who come after you.  Please complete them thoughtfully.

 

Academic Integrity

Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:

The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:

Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505

To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin.  Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications.  Additionally, your document will become part of the Turnitin database.

 

Recording of Classes

Your class may be recorded for educational purposes

 

Students with Disabilities

If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend.  If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.

 

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