FINC 6015: Trading in Modern Financial Markets
A trading report (20%)
“An analysis of topical issues in today’s financial markets”
Final Report Due Date: by 23:59, 9th May 2023 (Week 11)
[Note: Only one (1) soft copy of the A4 report to be submitted to CANVAS by one (1) member of your group]
Number of students per group: 4-6
Maximum number of pages: 8 A4 pages
Task:
There are several challenges that trading participants face when attempting to trade various asset classes
in today’s global market. Your task is to provide your perspectives on topical issues in the global trading
markets with the support of academic literature and key insights drawn from the Rotman Interactive
Trader (RIT) “trading games.” Specifically, you are required to address questions under the two topics
below.
Topic 1: Executing a large order and minimizing market impact costs
On March 10, 2023, you hear on the news about the biggest failure of a US bank since the global financial
crisis is playing out as a major lender in the tech industry succumbed to a classic bank run. Silicon Valley
Bank’s customers were frantically pulling their money from the California-based lender before US
regulators intervened to take control. But the collapse panicked markets, piling pain on weaker
financial institutions already struggling with the unintended consequences of soaring interest rates
and self-inflicted wounds.
On March 11, 2023, Anthony Pratt; one of the wealthy clients for Morgan Sydney Reynold Securities has
expressed grave concerns about his holdings in Credit Suisse. Owning 13% of the stock, he believes there
will be significant price declines in the banking sector shortly and wants to off-load his entire position in
Credit Suisse in the next 2-3 day. As an agency trader for Morgan Sydney Reynold Securities, you advise
that Anthony should be cautious in executing this strategy immediately, as executing a large parcel of
shares will result in significant price declines, resulting in a losing position. Anthony listens to your advice,
and insists that this position be off-loaded within the next 2-3 days and/or protected with minimal loss.
In the context of the above situation, your task is to:
i) describe the difficulties of executing a large SELL order to completion over a short-time period (i.e.
Within a trading day) also provide descriptions of the specific cost that one can incur (e.g., market
impact costs; opportunity costs, delay cost) in the context of the below situation
ii) describe the techniques available to reduce market impact costs and make commentary on the
effectiveness of such techniques to reduce market impact costs when executing large orders. (Note:
At least three techniques should be referenced).
Note: In addressing question 1, you should:
- refer to your own experience drawn from RIT trading, with calculations and supporting tables/graphs
used from your own trading records to highlight key points.
- Use Refinitiv Workspace to support your answer. That is, you may decide to plot the price trends of
various banking stocks and other securities and/or examine news reports around March 10, 2023.
- liberally use relevant academic references to justify your own personal beliefs and/or opinions.
Topic 2: Operating as a dealer in a competitive algorithmic trading world
It’s not easy being a dealer where it’s difficult to maintain an economic profit to stay in business. Yet,
dealers still exist; suggesting that this type of business is still viable in various markets. Your task is to,
address the following questions:
i) Are dealers beneficial for markets? Do they really supply liquidity?
ii) As a dealer, what’s more important: the fundamental or market value of a security? Discuss and
explain.
iii) How do trading rebates (instead of commissions) alter the economics of market making?
iv) When dealers set their prices, it is vitally important to be able to predict the short-term volatility of
the security that they are willing to provide quotes for. Pretend you are a dealer for both “gold”
futures contracts (on CME exchange) and “Tesla” shares (on NASDAQ exchange). Briefly outline and
distinguish the factors that you would need to “watch out for” that can move prices in these two
securities.
[Note: When answering this question, use Refinitiv Workspace to help identify the key factors that
can influence the prices for Tesla shares and gold futures contracts over a specified sample period of
your choice. You should outline these key factors with examples in your answer]
v) You have reached the final stage of a job interview at a prestigious market making firm in Sydney.
John, one of the interviewers (a very experienced market maker) asks whether you have programmed
any dynamic market making algorithms before. You reply “yes” where you show John the VBA code
you have used in the RIT sessions in class
Function marketmake(timeleft, starttime, stoptime)
Dim API As RIT2.API
Set API = New RIT2.API
' First, check to see if the trading time is between the start/stop time
If timeleft < starttime And timeleft > stoptime Then
' Next, check if there are any open orders in the order book. If it's empty,
submit two orders
If Range("Orders") = 0 Then
OrderID = API.AddOrder("ALGO", Range("BUY_VOLUME"), Range("ALGO_LAST") -
Range("SPREAD"), API.BUY, API.LMT)
OrderID = API.AddOrder("ALGO", Range("SELL_VOLUME"), Range("ALGO_LAST") +
Range("SPREAD"), API.SELL, API.LMT)
End If
'Also, check to seeif there's only 1 order in the order book. If so, cancel
all orders
If Range("ORDERS") <> 2 Then
API.CancelOrderExpr ("Price>0")
End If
End If
End Function
John is impressed and says “excellent”! …. and then he makes the following comment “the VBA code
that you showed me is a very simple dynamic automated market making algorithm.” John asks you to
provide three improvements to this algorithm that can maximize your economic profits and minimize
your inventory and adverse selection cost risk exposure. John also says to you that “if you give me the
right responses here, I am going to offer you the job on the spot”! You are required to outline three
improvements with appropriate reasoning.
Note: In addressing question 2, you should:
- refer to your own experience drawn from RIT trading, highlighting what feature you may have
included in your VBA program to automatically buy/sell shares.
- liberally use relevant academic references to justify your own personal beliefs and/or opinions.
How should your trading report be structured?
The presentation style for the trading report should be:
• articulate (i.e. sentences well-written and your ideas clearly expressed),
• clear and concise (i.e. not too wordy or rambling; conservative use of headings, subheadings and
possibly bold/underlined/coloured font to guide the marker is recommended),
• focused (i.e. to the point), and
• direct (i.e. straightforward, not evasive).
It is recommended that your trading report is kept simple and to the point. Your references should be
easily identifiable.
When your group addresses each of the questions within the topics, please ensure they are under the
following headings
Topical issue 1: Executing a large order and minimizing market impact costs
Topical issue 2: Operating as a dealer in a competitive algorithmic trading world
Please also use clear subheadings to signpost the specific question being addressed under each issue
heading (e.g. “Question i”, “Question ii”, etc.)
You will need to prepare this assignment as a professional report.
Marks will be primarily awarded to those trading reports that:
1) Provide sound responses to each question.
2) JUSTIFY your responses to the questions with relevant academic references.
3) Provide key insights drawn from your Rotman Interactive Trader (RIT)
Specific requirements
The trading report must not exceed 8 A4 pages (using size 12, times new roman font with 1.5 line
spacing), anything exceeding 8 pages will not be marked. The title page, table of contents, appendices
and references will be EXCLUDED as part of the 8 A4 page report limit.
Plagiarism is unacceptable at the University of Sydney and rules will be strictly enforced. Copying another
assignment is a clear case of plagiarism and WILL BE EASILY DETECTED.
Students should adopt a consistent referencing style format (APA 7th). Please see the following website
https://libguides.library.usyd.edu.au/citation
Penalties:
Late reports will be penalized at a rate of 5% of the total available mark per day.
Marks will be reduced by 10% for each page that your report exceeds 8 pages. Hence your mark will be
reduced to 0 if the report exceeds 18 pages.
Students will be penalized for incorrect referencing.