introduction to exchanges chris welty walleye trading
Post on 22-Dec-2015
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Introduction to Exchanges
Chris Welty
Walleye Trading
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Who is this guy?
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Walleye Trading
Hedge fund in Wayzata Quantitative focus ~35 employees
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Exchanges
What they are Growth Quantitative Finance
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History
1602 Amsterdam Stock Exchange 1730 Dojima Rice Exchange 1973 Chicago Board Options Exchange
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Why trade on an exchange?
Standardization Liquidity Information Credit Efficiency
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Executing a trade
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Increasing Computerization
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Match Buyers and Sellers
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Who Does What
Customer Broker Exchange
MarketMaker
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Broker
Accepts orders Executes orders Custodian Credit intermediation
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Market Maker
Provide prices Provide liquidity Sometimes, stabilize market
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Market Stabilization
NYSE Specialist Japanese Price limits Position limits
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Increasing Quantitative Trading
Stocks Foreign Exchange Futures Options
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Leads to massive growth
US Equity Options Volume
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
mil
lio
ns
of
co
ntr
ac
ts p
er
da
y
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NYSE Volume
NYSE volume ($ Trillion)
0
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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Market Growth
Reduced commissions Penny pricing Quantitative trading
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Quantitative Finance
Option Modeling Automated Trading
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Black-Scholes Model
Useful Not Practical
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Black-Scholes Price
0
5
10
15
20
25
30
35
40
45
50
60 70 80 90 100 110 120 130 140
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Black-Scholes Delta
0.0
0.2
0.4
0.6
0.8
1.0
1.2
60 70 80 90 100 110 120 130 140
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Gamma
0.000
0.005
0.010
0.015
0.020
0.025
0.030
0.035
60 70 80 90 100 110 120 130 140
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Rho (interest rate risk)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
60 70 80 90 100 110 120 130 140
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Model Enhancements
Discrete dividends Different interest rates Variable volatility Smile Term structure Proprietary
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Automated Trading
Algorithmic Execution Low-Frequency High-frequency
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Algorithmic Execution
VWAP Minimize trading cost Reduce information leakage
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Low Frequency Trading
Statistical Arbitrage Quantitative-based fundamental trading
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High Frequency Trading
Hot new area Enabled by electronic trading Analysis of large data sets