They imagine how impressed prospective students and potential donors will be with the flashy trappings, which usually include LED stock tickers and walls of video monitors. Trading rooms are so popular that, according to a recent survey by Rise Display, there are 277 of them actively operating in American and Canadian business schools, and between 35 and 40 could be added in 2014.
Many students find it difficult to apply business-school theories to real world situations. A trading room offers them a number of experiential learning opportunities, whether they’re observing how prices are affected by announcements from the U.S. Federal Reserve; writing reports based on historical, real-time, or simulated data; or acting as portfolio managers who run their own funds. Trading rooms allow them to be graded, not just by their professors, but also by the marketplace. In a trading room, they’ll find out that an actual market isn’t the friction-less environment they studied in business theory; it comes with pitfalls attributable to imperfect information and implementation costs. In short, they’ll learn that making a decision is one thing, but implementing it is something else.
TRADING ROOMS IN USE
But a trading room isn’t like the magical baseball diamond in the movie “Field of Dreams”—just because you build one doesn’t mean faculty and students will come to it. Professors frequently have to be convinced that they should take time from their crowded course schedules to run exercises in a trading room, and sometimes they need help visualizing the many ways in which such spaces can enrich their classes. Here are a few ideas:
Use the trading room to control how news announcements are released to students as they enter “buy” and “sell” orders in an exciting environment replete with rapidly changing prices. To crank the tension up some more, create information asymmetry by making the news available to only some of the students.
Create an exercise that helps students learn firsthand that their implementation decisions depend on the structure of the market they’re operating within. Use the simulated reality of a trading room to change one variable at a time, while keeping everything else constant, much like a lab scientist conducting an experiment.
Integrate the financial market into a non-finance course. For example, bring a marketing or accounting class into the trading room and have students start trading in a simulated marketplace. After a while, halt the exercise so that a team of students can make a presentation—maybe the marketing team will describe a new product launch or the accounting team will release an earnings report and price projections. Then resume trading and see what happens after the announcements. Do stock prices go up, or do they tank? What a nifty way to show that the price impact of new information also depends on how it is presented. And what a great way for students to experience how their work will be graded by the marketplace.
As this discussion implies, much of the action that takes place in a trading room has a finance application—enough so that “trading rooms” could be aptly renamed “financial services centers.” But trading rooms can have considerably wider relevance.
First, students aren’t just trading financial shares in a trading room; they’re trading book learning for experiential learning. But second, it’s not just finance and business students who can benefit from a trading room. Such a facility offers plenty of opportunities for a broad mix of students and faculty from around the campus.
As an example, math students can use a trading room to understand concrete applications of abstract concepts. Computer science majors can explore a spectrum of IT-related issues in a trading room. Journalism students can observe events on Reuters or Bloomberg terminals, then dig deeper to find related information.
Trading rooms also can be used as centers for community outreach. For instance, a business school can offer high school students and local residents financial literacy programs that utilize its trading room’s software and hardware. And finally, a trading room can be rented out for corporate training activities, which turns it into a profit center for the school.
Make no mistake, a trading room can be an expensive investment for a business school. But that investment can pay off handsomely by producing graduates who are more likely to be poised and ready to work in the real world.
Deniz Ozenbas is a professor of finance at Montclair State University in New Jersey. Robert Schwartz is Marvin M. Speiser Professor of Finance and University Distinguished Professor at Baruch College’s Zicklin School of Business in New York; he is also a developer/owner of TraderEx trading simulation software.