As derivatives trading becomes more reliant on technology and speed of electronic execution, a question arises: What's the best way to train the next generation of traders?
“We want to expose students to the world beyond classrooms and theory,” says Jim Oliff, chairman of the ETC and vice chairman, CME Board of Directors. ”In real life, emotions come into play that cannot be fully anticipated in a book or classroom setting.”
As a complement to formal classroom education, CME recently conducted a pilot trading competition that pitted teams of graduate students from the University of Chicago and Kent State University against one another in both long- and short-term simulated trading. They traded CME products using real-time prices and electronic trading platforms, hoping to win cash prizes, and also got real-time advice from experienced CME traders and CME product experts as they navigated the markets through both phases of the competition.
“This competition, along with CME marketing, research and education offerings, provides a unique partnership with academia, and offers practical application and real world skills,” says Mark Holder, the Kent State team advisor, associate professor of finance and director of the financial engineering program.
Although trading has primarily shifted from open outcry on the trading floor to screens and keyboards, students still require guidance to navigate the electronic trading landscape. “Trading floors used to be a source of mentoring and development for the next generation of traders,” says Alan Rottman, a CME Eurodollar trader since 1985 and one of the student mentors. “Mentoring is still essential, but it is happening in different ways. That does not lessen the value that our community can offer. Actually, it makes it more relevant.”
The professors advising the students agree.
“CME can provide enormous resources to an academic program, not the least of which is contact with market professionals who can offer practical rather than just theoretical advice,” says Holder. “CME is leading the way in affiliating with academia to prepare students to go out and be actively involved in the industry and trading.”
“Partnering with CME adds a vital and necessary dimension to our students' educational experience,” says Niels O. Nygaard, the U. of C. team advisor, professor of mathematics and director of the financial mathematics program. “CME adds the practical side to classroom theory and a wealth of educational resources – product specialists on staff, a body of traders to give meaning to classroom theory, and state-of-the-art trading practice in the CME Globex Learning Center.”
CME designed the competition with both long- and short-term trading components because each type of trading requires different skills and resources.
“In the long-term competition, students learned to apply passive or aggressive management to a varied portfolio in a real-life setting for several months, supported by CME's broad product base and extensive market data capabilities,” says Nygaard.
In contrast, the two-day short-term trading called for students to make quick decisions in dynamic markets while remaining disciplined and controlling their emotions – whether their trades generated profits or losses.
“I learned to be more conservative when there is real money at stake,” says Kent State student Sushant Khot. “I was pretty emotional with my losses, which I hadn't been in practice. I hadn't recognized how much my emotions could impact my trading decisions and how real money, and managing real money, would affect my attitude toward the market.”
CME staff, university professors and students from Kent State University and the University of Chicago wrap up their two-day trading competition.
The short-term competition also utilized live market data and advice from seasoned CME product experts and traders.
Larry Levin, a competition mentor with 20 years experience trading the CME S&P 500, was on hand throughout the short-term competition.
“I saw that one of the students was trading huge numbers of contracts at the beginning of the short-term competition,” says Levin. “I told him to do ones and twos only. You have to start small in trading, just as in learning any new skill.”
That student was Ankit Doshi from Kent State.
“I had been trading 20s, 40s and 60s,” says Doshi. “But I scaled way down to two or three contracts, and was much more cautious and it paid off. The real experience was very different than the practice. I hadn't realized how much risk I was actually taking trading all those contracts.”
The students all concurred that real trading for real money was an eye opener.
“Real-time trading is more stressful than practice trading, and the fast pace of the short-term trading was exciting,” says U. of C. participant Baptiste Grassion. “The GDP came out and everything changed unexpectedly. We hadn't encountered this in practice and until then I hadn't really understood how market events impact prices.”
U. of C. student Shruti Rao also found the real markets “a whole different ball game.”
“In theory everything seems easy, but it is more difficult in the real world,” says Rao. “And long-term trading is very different from short-term. I learned that each market has its own psychology and unique approach.”
Rottman also counseled the students to make sure they stayed in the game.
“My role was to listen, observe and look for creative ways to engage them. I reminded them to never reach their maximum loss per day,” says Rottman. “The objective is always to come back the next day. The market is always open.”
Derek Sammann, CME managing director, foreign exchange, assisted students in trading currencies during the short-term competition.
“The FX markets are fast moving, and I was happy to help the students know what to look for and offer what insights I could,” Sammann says. “The competition leveraged all of CME's strengths – market data, resources and our trading community.”
CME learned its own lessons from the pilot competition.
“We learned a great deal from the students about how we can improve and expand the practice trading experience and competition,” says Deborah Lenchard, CME associate director of market education. “Their feedback will help us provide more meaningful programming as we continue to expand the competition program and develop educational resources to prepare the next generation of traders.”
www.cme.com/glctrading