WHILE MANY BUSINESS schools devote significant attention to teaching students about investing, few of them go into depth about topics such as trading, liquidity, and market design. Trading—that is, the implementation of an investment decision—is a distinctly separate activity from portfolio management. But few business students today graduate with an understanding of how poor trading can seriously erode good investment decisions. They don’t understand the difficulties of handling big orders in an illiquid market, nor do they know how market design affects trading behavior. Today’s business courses typically cover risk and return, when they should be covering risk, return, and liquidity.
A good grasp of a market’s dynamics is essential for many business school graduates, not just those who plan to be traders. Portfolio managers should better understand the challenges traders face and the decisions they must make. CEOs and CFOs should be enlightened about how the complexities of stock price formation affect their share valuations. Government regulators must comprehend the intricacies of the equity markets, as must information science professionals since a growing subfield of fintech is the development and maintenance of trading system infrastructure.
In today’s trading rooms, finance and information science professionals regularly work side by side. Moreover, given that today’s trading desks are heavily dependent on technology, we see a great deal of collaboration among the fields of finance, data science, and information systems. Individuals who want to pursue any of these roles should have at least a basic understanding of trading.
But if business schools are going to provide students with a more comprehensive understanding of trading, what kinds of specialized knowledge should their classes include? At the Robert A. Schwartz Center for Trading and Financial Markets Research, which launched in 2018 at Baruch College’s Zicklin School of Business, we consider it essential to teach students to identify the costs and impact of those costs on portfolio performance, as well as illiquidity’s effect on stock prices. We want students to become proficient in concepts such as order types, algorithmic trading, and the complexities of price and quantity discovery. They should be familiar with trading system design, reliability, scalability, and open architecture, and they should understand the impact of technology on market design and quality.
We believe that students can best learn about the challenges traders face through experiential learning, and some of the most useful tools are trading simulations. One simulation that we use in our courses, TraderEx, was developed by one of the co-authors, Robert Schwartz, and Bruce Weber, dean and professor of business administration at the Lerner College of Business & Economics at the University of Delaware in Newark. Students enter orders into the simulation’s computer-driven market, and they can observe how their different actions generate different outcomes, even when they are all given the same instructions by their professors.
Courses we have taught and seminars we have run have shown how experiential learning enhances education by combining book learning with hands-on training. The feedback we have received has been encouraging. After one of our trading sessions, an IS student heading for the financial services industry told us that she, for the first time, understood how critical a solid infrastructure is for a trading desk. A finance student, accustomed to textbooks that treat a stock’s price as given for various finance valuation exercises, reported to us that, upon experiencing trading, he was struck by observing the substantial price variability introduced while prices are being determined in the marketplace. Another student, an economics major, said she appreciated how buyers and sellers meet through trading, and that it was eye-opening to see how the theoretical microeconomics model of demand and supply is played out in a real-world market. Particularly memorable was a young college student who spoke to us after an experiential session. “I really learned something,” she said. “What is it?” we asked. “That I could never be a trader” was her reply.
After students experience trading in an equity market, they are better prepared for the real world, where liquidity counts and market design matters. We believe that many more students need knowledge of this critically important, interdisciplinary activity.
|Deniz Ozenbas is a professor of finance at the Feliciano School of Business at Montclair State University in New Jersey.
| Robert A. Schwartz is the Marvin M. Speiser Professor of Finance and University Distinguished Professor at the Zicklin School of Business at Baruch College in New York City.