Financial Engineering Club

Fall 2015 – Info Session

• The FEC is the university’s premier quantitative trading club.

– Career enrichment

– Education

– Strategy development

Financial Markets

• A market where financial products are bought and sold.– Stocks, ETFs, Futures, Bonds, Swaps, Options

Market makersArbitragers

Speculators/InvestorsHedgers

Lenders/BorrowsBuyers/Seller

Execution ServicesBrokers

What is Quantitative Trading

• Trading + Science = Quantitative Trading

• Quantitative trading looks at the market from a scientific perspective– Create predictive models for the market– Price securities and manage risk with complex models– Statistically test a hypothesis– Automate trading strategies

What is Quantitative Trading

• Traders today need to know programming and statistics

• Many liquid products are becoming automated

• What’s left for traditional trading are more complex products

What is Quantitative Trading

• Combines the coolness of the tech industry – Free food– Casual dress code– Entrepreneurial and non-bureaucratic

• With the excitement of financial markets– Fast-paced, rapid feedback on your work– Merit-based– Challenging and intellectually rewarding

What are we about?

–Only club educating members on this industry• Market Making• High Frequency Trading• Quantitative Portfolio Management• Algorithmic Execution• Financial Engineering• Retail-Level Algorithmic Trading

Market Making

• True price of security is unknown• Offer quotes for a security using their best estimate of the true price• Always buying and selling intraday• Make money by making trades for edge, and managing their risk so that the total

edge offsets any adverse movements in the market• Options market making

• Quote: a buying and selling price offered by a market maker, – i.e 10.50/10.55 for a stock means they will buy the stock for up to $10.50 and sell it for at least $10.55

• Edge: the difference between the theoretical value and the traded value of a security. – i.e if you buy an option that is theoretically worth $10.53 for $10.50, you collected $0.03 of edge

High Frequency Trading

• In highly-liquid products such as equities, this is fully automated• In high-frequency trading, reaction speeds are extremely high and holding periods are

short.• Ping orders• Example: Triangle arbitrage of currencies

– CAD/USD – 0.75– EUR/USD – 1.11– CAD/EUR – 0.685 – 0.75 USD => 1 CAD => 0.66 EUR => 0.76 USD => $0.01 profit

• As these trades are made the price will shift back to equilibrium and the trade will no longer be profitable, so the first to make the trade will make the profit

• Hardware and network programming is important to shave off latency

Quantitative Portfolio Management

• Manage risk quantitatively

• Fama-French Four Factor Model

• Kelly Criterion

• Applying quantitative strategies in your portfolio.

Algorithmic Execution

• How do we execute a large block order and get the best fill price?

• Hidden liquidity in dark pools

• Implementing the execution software in a language like C++

Financial Engineering

• Derivative pricing– Pricing should be arbitrage-free

• More prominent in banks

• Structure complex products

• The focus of many financial engineering programs is on derivatives pricing as opposed to trading.

Retail-Level Algorithmic Trading

• Many good platforms– Interactive Brokers– Trade Station

• Learning– Quantopian– Blogs and books• Ernie Chan

Pairs Trading - A Strategy

Consider CAD/USD vs AUS/USD• Both economies are

commodities driven, maybe there is a way to exploit this relationship?

Hypothesis• The ratio CAD/AUS

should be on average constant and not trending (more precisely, stationary)

Check for a relationship:• Run the Johansen test to

test if a linear combination of CAD/USD and AUS/USD is stationary, and find the hedge ratio

Statistical Arbitrage:• When CAD/USD is too

high/low vs AUS/USD, short/long CAD/USD and long/short AUS/USD.

• Expect that the value CAD/AUS will revert to its mean.

Back testing• Implement the algorithm

and test it on historical data

• What is the sharpe ratio?• What is the maximum

drawdown? • Parameter tuning

Forward testing on live data Monitoring Continuously improve

• The FEC is the university’s premier quantitative trading club.

– Exploring career options?

– Interested and want some edge to your resume?• Traders• Portfolio Managers• Quantitative Researchers• Software Developers

– Want to pursue algorithmic trading on the side as a retail trader?

Education

• Lecture Series– Trading 101– Options Trading & Market Making– Building an Algorithmic Trading Strategy

• Workshops– Options Trading Simulations– Interview Question Jeopardy

Corporate

• Company Info Sessions• Intermediate Level Seminars• Networking Opportunities

• 9/12/15 – Transmarket Group Hackathon• 9/15/15 – Chicago Trading Company• 9/22/15 – DRW Trading Group• 9/23/15 – Akuna Capital

Trading Competitions

• MIT Fall Intercollegiate Trading Competition

– Nov 2014

• Rotman Trading Competition

– Spring 2015

• U-Chicago Midwest Algo-Trading Competition

– Spring 2015

Quantopian Competition

• Work on an automated strategy using Quantopian’s platform

• Competition is judged by Quantopian

• Winning organization gets to manage a real $25,000 portfolio

Poker Social

• Texas Hold’em Tournament every semester

Upcoming Events• Transmarket Group – Build Your Own Exchange Competition– Saturday, Sept 12th – 12:00pm-5:00pm– L440 DCL

• Chicago Trading Company - Info Session– Tuesday, Sept 15th – 5:00pm-6:30pm– 106B1 Engineering Hall

• Trading 101– Wednesday, Sept 16th – 6:00pm-7:00pm– 106B1 Engineering Hall

Thank You!

Website: http://www.fec.ec.Illinois.edu/

Facebook Group: https://www.facebook.com/groups/676291532479836

Facebook Page: http://www.facebook.com/UIUCFEC

LinkedIn: http://www.linkedin.com/financialengineeringclub

Email: uiuc.fec@gmail.com

JOIN OUR MAILING LIST AT http://fec.ec.illinois.edu/join/