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Introduction to Exchanges
Chris Welty
Walleye Trading
Who is this guy?
Walleye Trading
Hedge fund in Wayzata Quantitative focus ~35 employees
Exchanges
What they are Growth Quantitative Finance
History
1602 Amsterdam Stock Exchange 1730 Dojima Rice Exchange 1973 Chicago Board Options Exchange
Why trade on an exchange?
Standardization Liquidity Information Credit Efficiency
Executing a trade
Increasing Computerization
Match Buyers and Sellers
Who Does What
Customer Broker Exchange
MarketMaker
Broker
Accepts orders Executes orders Custodian Credit intermediation
Market Maker
Provide prices Provide liquidity Sometimes, stabilize market
Market Stabilization
NYSE Specialist Japanese Price limits Position limits
Increasing Quantitative Trading
Stocks Foreign Exchange Futures Options
Leads to massive growth
US Equity Options Volume
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
mil
lio
ns
of
co
ntr
ac
ts p
er
da
y
NYSE Volume
NYSE volume ($ Trillion)
0
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Market Growth
Reduced commissions Penny pricing Quantitative trading
Quantitative Finance
Option Modeling Automated Trading
Black-Scholes Model
Useful Not Practical
Black-Scholes Price
0
5
10
15
20
25
30
35
40
45
50
60 70 80 90 100 110 120 130 140
Black-Scholes Delta
0.0
0.2
0.4
0.6
0.8
1.0
1.2
60 70 80 90 100 110 120 130 140
Gamma
0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
60 70 80 90 100 110 120 130 140
Rho (interest rate risk)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
60 70 80 90 100 110 120 130 140
Model Enhancements
Discrete dividends Different interest rates Variable volatility Smile Term structure Proprietary
Automated Trading
Algorithmic Execution Low-Frequency High-frequency
Algorithmic Execution
VWAP Minimize trading cost Reduce information leakage
Low Frequency Trading
Statistical Arbitrage Quantitative-based fundamental trading
High Frequency Trading
Hot new area Enabled by electronic trading Analysis of large data sets