Trade Secrets

Students learn to invest money and track stocks at simulated trading floors on b-school campuses. But, they aren't necessarily going on to careers in finance - a trading floor can be used to support almost any business school discipline.
Trade Secrets

The bell rings, the market opens—and business school students begin their trading day. At a small but growing number of universities, such a scenario is becoming more common, as b-schools add simulated trading floors to their high-tech offerings. The costs are steep for building these windows into the real world, but administrators say the benefits can be enormous. Students come away with an array of analytical and computational skills; the business community often finds ways to take advantage of the facility; and alumni and top donors are impressed by the school’s cutting-edge technology.

Yet it’s not a simple task to convince faculty to integrate trading room simulations into their courses, and before building such an expensive facility, schools must know who will use a trading center—and how.

“Will your trading floor be a publicity gimmick? A high-tech lab? A tourist stop? A library? It can be all of those, but it should be a way to bring students to the classroom, a platform that delivers education in an exciting manner,” says John Siam, director of the Allen H. Gould Trading Floor and assistant professor of accounting in financial management services at McMaster University’s Michael G. DeGroote School of Business, Hamilton, Ontario. “If you’re creating a lab that builds expertise for forecasting, you don’t have to have real-time data. If you’re training people to be brokers and traders, you do. Understand your goals first, or you could spend a lot of money and end up with something that doesn’t suit your purpose.”

“The easiest thing in the world is to make a financial center look flashy, so that when you’re bringing through alumni or potential donors or corporate sponsors, you can have a big plasma screen that’s flashing real-time data. You can have the stock ticker that runs the length of the ceiling,” says Keith Brown, professor of finance, and president and CEO of the MBA Investment Fund at the McCombs School of Business at the University of Texas at Austin. “But in some sense, that’s almost like creating a Hollywood set. The real issue is whether all those facilities are being used by the students. You have to think about what you’re trying to deliver—not only in content, but in how you can deliver content to students.”

For some schools, it’s easy to decide to build a high-tech center complete with a trading floor. For instance, Baruch College of the City University of New York serves the financial services market of New York; therefore, administrators wanted a way to equip graduates with real-life forecasting skills. McCombs School built its trading floor partly in support of an existing program, the MBA Investment Fund, in which students learn to manage real money.

Other schools might find they don’t need a trading floor at all. Carnegie Mellon University in Pittsburgh, Pennsylvania—which opened one of the first educational trading floors in 1991—has essentially dismantled the physical space set aside for the trading floor. However, the school continues to utilize trading technology and data feeds while students use laptops and Internet technology to participate in market simulations.

Figuring Out the Floor

Each school that sets up a trading room probably will take a different approach to designing the floor and acquiring technology. In general, administrators must determine how many computers they need, how to lay out the floor plan, and which suppliers and products to work with—which may include Reuters, Bloomberg, Bridge, NASDAQ, Dow-Jones, Thomson Financial, Trans-Lux, Crystal Ball, and others.

What’s most important is offering technology with breadth and depth, says Patrick Gregory, an assistant professor of finance at the McCallum Graduate School of Business at Bentley College in Waltham, Massachusetts. He’s also managing director of the Hughey Center for Financial Services, which houses the school’s trading room. “If you don’t have technology that’s applicable within multiple disciplines, you’re never going to run the room at capacity,” he says. “You need to have historical data that can be analyzed and interpreted, combined with real-time data, so that the room can be used by someone taking an economics course, a finance course, or an accounting course.”

When considering actual floor design, some schools, like Bentley, choose a layout that mimics that of a true trading floor. Others, like Baruch, make theirs look more like a traditional classroom.

“In a real trading room, desks are clustered together to allow people to interact with each other closely,” says Bruce Weber, associate professor and director of the Subotnick Financial Services Center at Baruch’s Zicklin School of Business. “But we have real trading-room furniture set up as a classroom, in a typical horseshoe shape, with the instructor up front. Every desk has a computer equipped with real market data software. There are also projection screens on the wall so students can see what the professor is doing and follow on their own computers.”

Baruch officials decided early on to avoid software that would make the students’ lives too easy. “You can subscribe to data and software packages that do a complete analysis of fixed income instruments or bond markets, show you the important details, and set up the graphs,” says Weber. “But we wanted the students to get their hands dirty developing software, applications, and spreadsheets. Students might create a spreadsheet with live market data which examines, let’s say, whether an option pricing model is an accurate predictor of real market prices or whether the arbitrage opportunities that could exist when a stock trades in multiple markets do in fact exist. They learn to track pricing relationships over time so they can set up a spreadsheet that will record prices on a minute-by-minute or tick-by-tick basis. They can find out if these pricing relationships hold at any given point in time or, over the course of the day, how far the price deviates from its theoretical value. There’s software that can do those computations for you, but we want the students to work with the raw data and create their own models and analyses.”

At Carnegie Mellon, the data feeds have been de-emphasized. The school now relies on technology available over the Internet that can be accessed by any student with a laptop, says Sanjay Srivastava, professor of economics and finance and alumni professor at the school’s Graduate School of  Industrial Administration. “Much of what we use are trading simulations and analytic tools for students to do exercises and manage portfolios,” he says. “They can access the Internet from wherever they are as opposed to coming to a dedicated facility. Thus we can do labs within regular classrooms, using laptops and wireless connections.” Such flexibility enables remote students and those in specialized courses to take trading simulation courses as easily as students on campus can.

For schools that are setting up a physical space for a trading center, the costs are significant. Gregory estimates that such a facility can’t be built for less than $1.5 or $2 million—just for construction and hardware. “That figure doesn’t include operating budgets that will be required for the various data feeds, which will be a recurring expense each year,” he says.

Vendor costs vary from school to school according to the licensing agreement negotiated by each university. While some vendors offer special educational prices to schools, Weber points out that the downturn in the market may have had a negative impact on how much suppliers can afford to discount. “The first few trading rooms were built with a lot of generosity, but I think schools that are expecting vendors to line up to make product and service donations now are going to be disappointed,” says Weber. “I think future centers will need to budget in the costs of buying the products from the vendors on a more realistic level.”

Wooing the Faculty

No matter how well a trading floor is equipped and laid out, it will remain idle if the faculty resists using it. Making sure all faculty members are familiar with the equipment and comfortable in the trading room is one of the major jobs of a trading floor director.

One reason professors stall is because the technology can be so daunting. “An educational trading center has the same technology you would find on a real trading floor, and that means it’s professional-grade technology that’s not easy to use,” says Weber. “Just figuring out what the Reuters symbols are for getting the price of crude oil futures is not a simple thing. You have to know the month of the crude oil you want, whether you want the New York or London contract, the symbol of that particular commodity, and whether you want the bid price, the offer price, the last trading price, or the settlement price. It’s a learning curve, and you have to get up that curve before you can really make full use of the technology.”  

THE REWARDS FOR STUDENTS ARE TREMENDOUS, SRIVASTAVA SAYS. “ACTUALLY DOING SOMETHING IS MUCH DIFFERENT FROM LEARNING THE THEORY OF DOING IT. IT’S A VERY DYNAMIC ENVIRONMENT. WHEN I RUN A TRAINING EXERCISE, I DON’T KNOW WHAT’S GOING TO HAPPEN. NO ONE KNOWS WHAT THE ULTIMATE OUTCOMES WILL BE.”

To draw in professors from all departments, program directors work hard to train faculty and help them adapt course content to the trading room. At Bentley, Gregory offers customized training courses for faculty, organized by discipline. “As an example, I might provide a 75-minute program for the accounting faculty. I’ll spend 30 minutes providing an overview of the facility and the available technologies. Then I ask a faculty member in that department who’s currently using the trading room to give a brief demonstration of how he’s utilizing the tools for his class. That makes it a bit more discipline-specific. We spend the remainder of the time brainstorming as to how the facility could be further integrated into the classes.”

Similarly, Siam and his staff at McMaster help professors do research on areas like market structure data, and run experimental labs for economics and behavioral finance classes. Siam hires 15 students each semester to help professors tailor their courses to the trading floor. “You have to accommodate the professors. You have to meet them halfway,” says Siam. “Once the professors have prepared modules that can be used every year, they become avid users of the trading room.”

Weber also hires grad students to help out in the trading room, keeping them on site whenever a class is being held. He says, “This is hands-on instruction, and if you’re a professor and you’re teaching 60 people, you can’t walk around to every single student to see how they’re doing. So we have grad students who can help keep everyone on track.”

The hard work pays off when faculty members across disciplines begin to use the rooms. Says Gregory, “We counted last week, and we had 16 different classes conducted in the trading room. They ranged from classes taken by all incoming freshmen through graduate classes in fixed income securities, derivatives, and tax practice. The departments that use the trading floor include accounting, CIS, management, finance, economics, and mathematics.”

Professors who don’t utilize the trading room might soon be at a disadvantage. “These trading floors have really upped the ante for faculty in terms of what it takes to be relevant,” says Brown. “When I came to the University of Texas in the mid-1980s, to be considered a relevant professor, you just had to clip an article out of that morning’s Wall Street Journal and talk about it in class. Now, even an article in this morning’s paper is old news. Once professors figured out how the trading room worked, they could make the whole classroom experience more immediate. Our students walk out of the room a lot more savvy about how markets work.”

Student Involvement

Business students generally walk into the trading rooms excited about the possibilities, say administrators. At Baruch, the goal is for 100 percent of MBA students to have programs that will make them familiar with the facility. The percentage of undergraduates stands closer to 30 or 40 percent, says Weber, “just because the advanced classes can make use of the room more easily. Students have to understand the basic concepts of finance before they start talking about how to get options pricing data from the Chicago Board of Options Exchange.”

At Bentley, says Gregory, the trading room is used in core classes that all freshmen, sophomore, and junior business majors must take, so thousands of students stream through the facility every year. “It’s very important that you move through in a stepwise progression, whether through orientation programs or through integrating the facility into courses at the beginning of students’ college experiences,” he says. “First students must understand the functionality of the tools and the technology that is available. Then, as they move into their junior and senior years, they will begin to use that technology more fully to analyze a particular business situation.”

The rewards for students are tremendous, Srivastava says. “Actually doing something is much different from learning the theory of doing it. It’s a very dynamic environment. When I run a training exercise, I don’t know what’s going to happen. No one knows what the ultimate outcomes will be. So we’re all reacting to other people, and we’re reacting to information. Students learn that the thought process they’ve developed helps them more than the blind application of any tool or technique. They learn the extent to which different techniques are useful, along with the biases, weaknesses, and strengths of specific tools.”

Students with hands-on trading room experience often have a better chance at landing a good job because they can save their employers six to 12 months of training time, Siam estimates. And the more updated the equipment, the more valuable the graduate. McMaster just upgraded the center’s computers—and its students’ level of knowledge.

“We found we can develop some core knowledge here,” Siam says. “We have established a program with Reuters so that our people are on call to demonstrate products to some of their clients. This means that Reuters must keep our equipment current so we can learn the very latest in its technology. We also have a summer internship program with Reuters, which is another way for us to link our program with their company.”

For all business students, it’s essential to keep pace with the rapid technological changes occurring in the corporate arena. Students who have access to a trading floor, which is both high-tech and high-touch, will find it easier to keep their feet when they graduate into the fast-moving world of business.