Preferred Communication: email and telephone
Preferred Communication: email and telephone
W, 6:20pm to 8:50pm
Class will not meet on:
Class will meet on:
As financial markets become more electronic and more liquid, a higher degree of knowledge about systems
and analytics is required in order to compete. This course teaches students how modern financial markets
function as a network of systems and information flows, and how to use the information emanating from
the markets for decision making and building and implementing systematic computer-based models for
The financial industry as we know it today wouldn’t exist without high powered information systems.
These systems make markets possible through electronic intermediation and supporting services such as
data and analytical support, payment, settlement, authentication and representation. They are also becoming
used increasingly to support or make decisions about taking or controlling some sort of risk – financial,
operational, and regulatory.
The course begins with a description of the financial markets, specifically, equity, currency, fixed income,
and commodities, and the systems that enable them. We consider exchanges, ECNs, and other dealer
markets and the information that emanates from them. This provides the backdrop for the bulk of the
course which covers the design, evaluation and execution of trading strategies that are commonly used by
professionals in the various markets. There is increasing interest in particular, on systematic trading
strategies and execution systems because of their scalability and transparency.
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.
DRAFT, SUBJECT TO CHANGES:
|1. Jan 26||Introduction and Course Objectives||None|
|2. Feb 02||Review of portfolio theory, basic measurement of markets and in class exercise||Bring your laptops to class!!!|
|3. Feb 9||Markets and basic measurements of direction and volatility||Life at Sharpe’s End||Assignment 1|
|4. Feb 16||Technical trading: Trend Following Systems||Reading||Assignment 2|
|5. Feb 23||
Technical trading: Trend and Counter-trend
|6. Mar 02||Technical trading: spreads and pairs trading||Reading||Assignment 4|
|6. Mar 09||Fundamentals and currency trading strategies||FX Guide|
|7. Mar 23||Value-Based Equity strategies||Barra on Campus Reading (JM)||Assignment 5|
|8. Mar 30||Discretionary strategies||TBA (AR)|
|9. Apr 06||Events and pattern recognition strategies||TBA||Assignment 6|
|10. Apr 13||High frequency trading||Reading (AB)|
|11. Apr 20||Artificial Intelligence and Trading||Reading (VD)|
|12. Apr 27||Projects||None|
|13. May 04||Projects||None||Project due May 5|
Because of the currency and richness of the topics, it is very difficult to find a single textbook that is
simultaneously rigorous, and practical. Accordingly, there is no textbook for the course, but focused
readings that cover the topics covered in the lectures and assignments. However, students are encouraged to
scour the Internet for interesting books and readings that emerge periodically. For those students wanting
details on market indicators and measurement, for example, a useful textbook is:
New Trading Systems and Methods, Perry Kaufman, Wiley 2004 (Fourth edition)
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
A more recent book that describes at a high level the basis for quantitative trading strategies is:
Inside the Glass Box: The Simple Truth About Quantitative Trading, Rishi Narang, 2009
In addition to the 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 are the following
1. Alpha Models (Chapter 3 Narang)
2. Life at Sharpe’s End: covers performance measurement, especially the Sharpe Ratio and its
3. BARRA on Campus: provides a general overview of risk and its measurement
4. Trend Following Systems (Chapter 8 Kauffman)
5. Reconciling the Structural Forces on the Dollar, DB Research Report: provides a macroeconomic
basis for trading currencies
6. DB Guide to FX Trading: provides the various approaches to building currency trading strategies
7. Semantic Orientation (Turney); Text processing
8. Interview with William Eckhardt, from The New Market Wizards: talks about the assumptions
about market behavior that underlie trading strategies
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.
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:
• Is there any relationship between current volatility and future returns in equity, bond, and currency
or commodity markets?
• Which macroeconomic indicators have exhibited a consistent influence on which markets and
what could explain this?
• Under what conditions would you expect an automated trader to outperform a human and why?
• Design and evaluate a fundamentals or technicals based trading strategy to trade indices,
individual stocks, ETFs, etc.
• What will the electronic trading marketplace look like in 5 years and why? What are the
implications of this structure for individual and institutional investors?
• Engineer a system where you can describe the market conditions under which it would make and
lose money. How would you position such a system for investors?
• Is high frequency trading worthwhile? In which markets? Why or why not?
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
The assignments will address the following types of questions:
1. Has there been any correlation historically between equity market volatility and direction?
2. What types of trend following models have worked historically in equity, currency, and fixed
income markets and why? How do you compare models?
3. What are “market neutral” strategies? How and when does pairs trading work?
4. Is there any relationship between fundamentals such Trade Balance, interest rates, etc and dollar
5. Are “market anomalies” tradable? Is it possible to predict earnings surprises? Why or why not?
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.
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.
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.
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:
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 are important to us and to students who come after you. Please complete them thoughtfully.
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.
Your class may be recorded for educational purposes
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.