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
Execution Services
Brokers
Market makers
Arbitragers
Speculators/Investors
Hedgers
Lenders/Borrows
Buyers/Seller
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
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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
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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
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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?
Check for a relationship:
Statistical Arbitrage:
• The ratio CAD/AUS
should be on average
constant and not
trending (more precisely,
stationary)
• Run the Johansen test to
test if a linear
combination of CAD/USD
and AUS/USD is
stationary, and find the
hedge ratio
• 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.
Forward testing on live
data
Monitoring
Continuously improve
Hypothesis
Back testing
• Implement the algorithm
and test it on historical
data
• What is the sharpe ratio?
• What is the maximum
drawdown?
• Parameter tuning
• The FEC is the university’s premier quantitative trading club.
– Exploring career options?
– Interested and want some edge to your resume?
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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
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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/