Mastering the Art of Equity Trading Through Simulation, + Web-Based Software: The TraderEx Course / Edition 1

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Overview

"This book is not about abstract models of trading, or theoretical √°it's,' or purely academic analysis. It puts you right in the middle of simulated markets and successfully shows you how financial markets operate, how to handle your strategic decisions, how to react to market conditions, how to be honest, and on top of all of that, how to trade with a long-run perspective." -From the Foreword by Dr. RETO FRANCIONI. CEO, Deutsche Borse" "The TraderEx simulation software very much succeeds in capturing the dynamics of trading in today's fast moving markets. A number of us at ISE, including me, have used it, found it most informative, and are very pleased to see it being made available with this excellent book." -GARY KATZ, President and CEO, International Securities Exchange" "This book covers every major aspect of today's electronic markets of importance to a trader. Auctions, order books, dealer markets, and dark pools are all treated with the depth and insight that reflect the authors' deep knowledge and understanding of modern equity trading. The TraderEx course will challenge, intrigue, and reward those who successfully master its principles and concepts."-FRANK HATHEWAY, Chief Economist, NASDAQ OMX Group, Inc." "TraderEx is a fantastic hands-on tool that brings electronic trading to life without the risk of losing your shirt! From the experienced trader to the student of market structure, TraderEx simulations are as addictive to play as they are educational. Only TraderEx has the most current market models and trading strategies that are being used right now in today's marketplace. The simulations are TraderEx's, but the awesome experience and insight are all yours!" -JAMES ROSS, Vice President, NYSE Crossings, NYSE Euronext" Mastering the Art of Equity Trading through Simulation is a guidebook to interactive computer trading simulation designed to provide hands-on experience in making tactical decisions and implementing them in different' market structures-from continuous; order-driven markets and calf auction markets to quote-driven dealer markets and negotiated block markets. Part One establishes a background on trading and markets from an economic perspective and provides an overview of the simulation model and TraderEx software. Part Two then presents a sequence of exercises in which you will trade in different market environments created by the TraderEx software and its settings. By showing you how to operate in these different environments, you'll quickly discover a good deal about what trading involves and how market design impacts trading decisions.

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Product Details

  • ISBN-13: 9780470464854
  • Publisher: Wiley
  • Publication date: 7/6/2010
  • Series: Wiley Trading Series , #428
  • Edition number: 1
  • Pages: 260
  • Product dimensions: 7.40 (w) x 9.20 (h) x 0.70 (d)

Meet the Author

Robert A. Schwartz is Marvin M. Speiser Professor of Finance and University Distinguished Professor in the Zicklin School of Business,?Baruch College, CUNY. He is the developer, with Bruce Weber and Gregory Sipress, of the trading and market structure simulation, TraderEx.

Gregory M. Sipress is the head of software development at TraderEx, LLC.

Bruce W. Weber is a Professor of Information Management at the London Business School.

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Table of Contents

Foreword Professor Dr. Reto Francioni Francioni, Professor Dr. Reto

Preface

How TraderEx Works

Who This Book is For

Overview of the Book

Downloading the TraderEx Software

How TraderEx Works with Micro Markets

Acknowledgments

PART ONE An Overview of Equity Market Trading 1

Chapter 1 Equity Market Trading 3

The Costs of Trading 5

Liquidity 8

Market Structure 9

Informational Efficiency (or the Lack Thereof) 11

Expectations 14

The Players 16

Summary 18

Chapter 2 Simulation as a Learning Tool 19

Canned versus Computer Generated Prices and Quotes 19

Appendix: Inter-Temporal Returns Correlation 33

Summary 37

Chapter 3 How to Use TraderEx 39

An Overview of the TraderEx Environment 40

The Continuous Order Book Market 45

The Dealer Market 63

Call Auctions 67

Block Trading Facility 70

Crossing Network 77

Hybrid Markets 78

Summary 81

Chapter 4 Introduction to the Trading Exercises 83

The Buy-Side Perspective 84

The Sell-Side Intermediary Perspective 93

TraderEx Performance Measures 96

Summary 104

PART TWO TraderEx Exercises 105

Chapter 5 Microeconomics Goes to Market 107

Exercise 5.1 The Look of a Financial Market 108

Exercise 5.2 What Are Your Attitudes Toward Risk? 114

Exercise 5.3 Call Market Trading 117

Exercise 5.4 Trading Costs in Action 123

Exercise 5.5 Dealer Costs and Inventory Control 126

Exercise 5.6 Inter-Market Competition for a Stock Exchange 128

Exercise 5.7 Finding an Equilibrium Value 131

Exercise 5.8 Economic Effects of an Order Protection Rule 133

Conclusion 135

Chapter 6 The Order Book Market Structure 137

Exercise 6.1 Entering Limit Orders 138

Exercise 6.2 Entering Market Orders 141

Exercise 6.3 Adjusting Limit Orders 142

Exercise 6.4 Sizing your Orders---Markets and Limits 144

Exercise 6.5 Post-Trade Analysis 147

Exercise 6.6 A Really Big Order 149

Exercise 6.7 Another Really Big Order 157

Exercise 6.8 Illiquidity 157

Exercise 6.9 Heightened Volatility 159

Exercise 6.10 News and Changing Expectations 162

Exercise 6.11 Endogenous Expectations 165

Exercise 6.12 A One-Year Holding Period 166

Exercise 6.13 Crossing Networks 167

Exercise 6.14 A Networked Simulation 168

Conclusion 172

Chapter 7 The Call Auction Market Structure 173

The Price Setting Mechanism in TraderEx Call Auctions 174

Exercise 7.1 Mechanics of the Opening Call Auction 182

Exercise 7.2 Your TraderEx Call Auction Orders 186

Exercise 7.3 Your Influence on TraderEx Call Auction Prices 186

Exercise 7.4 Participating in the Opening Call Auction 191

Exercise 7.5 Working a Large Order with Call Auctions 192

Exercise 7.6 Proprietary Trading with Call Auction, and News Releases 206

Exercise 7.7 Emphasizing Different Dimensions of Trading Performance 207

Exercise 7.8 Alternative Call Structures: A Partially Disclosed Call Auction and a Time Priority Call Auction 208

Conclusion 211

Chapter 8 Dealer Markets: What Do the Trading Intermediaries Do? 213

Operations of Quote Driven Markets 214

Exercise 8.1 Changing Quotes to Control Your Inventory 219

Exercise 8.2 Market Maker Performance 221

Exercise 8.3 Market Maker Risk Performance 223

Exercise 8.4 Preferencing in Market Maker Systems 225

Exercise 8.5 Volatility and Market Making 228

Exercise 8.6 Low Liquidity and Market Making 229

Exercise 8.7 Alternative Trading Systems and Market Making 233

Conclusion 234

Chapter 9 Dark Pools: How Undisclosed Liquidity Works 235

Exercise 9.1 Mechanics of the Dark Pool 240

Exercise 9.2 Seeking Advantages from Dark Pool Pricing 242

Exercise 9.3 Working a Large Order with a Dark Pool 244

Exercise 9.4 Proprietary Trading with Dark Pool, and News Releases 246

Exercise 9.5 Emphasizing Different Dimensions of Trading Performance 247

Exercise 9.6 Dark Pools and Trade-Through Rules 249

Conclusion 250

About the Authors 251

Index 253

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