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February 1, 2000

Cover Story - Hey! Are You Ready for Some Trading?

By Sanford Wexler

Every Monday night a group of students calling themselves the Trading Room Task Force gather in the basement of Building E52 at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Mass.

No, they are not taking time off from their studies to watch Monday Night football. They are spending their free time running various buy-side trading scenarios in a 3,000-square-foot simulated trading room that features real-time, tick-by-tick price-volume data from Reuters, Bridge and Bloomberg on all 300,000 financial instruments worldwide as well as a TIBCO trading platform and an IPC Tradenet telephone network.

David Yang, a class of 2000 undergraduate who helped found the Task Force, said the "games let people see how the stuff they learn in the classrooms might actually be applied in real life."

"The main thing is the pressure," he said. "A lot of people who play the games are very serious about it, so it almost feels like it's a real trading room. And you're also trying to beat everyone else at the psychological game."

Not for Minting Pros

Andrew Lo, a professor of finance at the Sloan School, said the trading program is not geared towards turning out professional traders. The primary focus is to teach students about the various aspects of buy- and sell-side trading and how to use financial technology they will encounter in their careers.

"A number of students discover they do not want to do anything remotely like trading, having played the games. That's one of the benefits of having a trading room and mock trading games," Lo said. "It prevents students from pursuing careers that at first they thought were very glamorous, but later find out that it wasn't right for them."

Sloan's trading program introduces students to a wide range of buy- and sell-side trading and risk management simulations. In one exercise, students trade fictitious securities among themselves, creating the market making mechanisms. "The price discovery process is something that they themselves are participating in as opposed to merely doing mock trading with prices that are obtained from the New York Stock Exchange," Lo explained.

Sell-Side Trading

Another simulation covers sell-side trading. The goal is to figure out how to split up a large order into small orders so that the overall price impact of the trade is minimized. This simulation effectively demonstrates to students the importance of controlling trading costs.

"The students are not trading on New York Stock Exchange prices," Lo said. "They are trading on prices that we generate based upon historical behavior of New York Stock Exchange prices. We control the degree of price impact that they [the students] suffer when they start trading larger and larger quantities."

Lo added that the simulation "is an attempt to see whether the students can figure out intuitively what the mathematically optimal algorithm is for trading in an efficient manner."