Trading to win

12/2/2011 - Liquidity slippage. Margin trading. Price discovery. With knowledge of these and other financial market intricacies, two business-savvy students in Kellogg’s Certificate Program for Undergraduates earned first place and more than one million (simulated) dollars at a trading competition in November at the Massachusetts Institute of Technology (MIT).

Working as a team at the Traders@MIT competition, Weinberg College of Arts and Sciences seniors Steven Chen and Joon Yoon put their classroom understanding of economics, markets, statistics, business, probability and mathematics to the test, developing models and devising profitable trading strategies in six different trade scenarios.

Two of those scenarios involved “on-the-floor” pit trading, complete with hand gestures and paper market orders. The others were computer-generated trading situations involving equities sales and trading, crude oil commodities, price discovery and foreign currency exchange.

“When you’re actually out on the floor, it’s like in the movies where everyone’s yelling and gesturing and people really get into it,” said Chen. “A team might start cheering after they took a big position in the market and the market moved in the direction they wanted.”

“It was intense, exhilarating and fun," added Yoon.

Both Chen and Yoon are majors in mathematics and economics, and are in the Mathematical Methods in the Social Sciences Program and the Kellogg Certificate Program for Undergraduates in financial economics. The latter program sponsored the Northwestern team.

“Instead of trading real-world money, we were trading different products in a simulated, time-compressed environment against (two-person) teams from some of the country’s best universities,” Chen said. And unlike Northwestern with only one team in the competition, most of the competing institutions — which included MIT, Harvard and University of Chicago — had as many as five teams competing.

In general, one team member would be analyzing and interpreting data and advising the actual trader about what to do. “It was a great chance to apply the econometric and economics concepts we’ve learned in class to construct models and devise strategies,” said Yoon. After the competition, the top winning teams went to dinner with representatives of a leading electronic arbitrage trading and market-making firm.

“Steven and Joon share a passion for trading, and prepped and performed so well that they bested all of the other prestigious universities,” said Carol Henes, director of the Kellogg Certificate Program. “We are very proud of their impressive victory.”

In 2012, the two will take the knowledge they gained at the MIT contest to a similar trading competition at the University of Toronto’s Rotman School of Management. Earlier this year, they were part of a four-person undergraduate Northwestern team that snagged fourth place in the 2011 Rotman International Trading Competition, which included graduate and MBA students.