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Mastering the Art of Equity Trading Through Simulation: The TraderEx Course, + Web-Based Software


Praise for Mastering the Art of Equity Trading Through Simulation
+ Web-Based Software: The TraderEx Course

"This book is not about abstract models of trading, or theoretical 'if's,' or purely academic analysis. It puts you right in the middle of simulated markets and successfully shows you how financial markets operate, how to handle your strategic decisions, how to react to market conditions, how to be honest, and on top of all of that, how to trade with a long-run perspective."
From the Foreword by Dr. Reto Francioni, CEO, Deutsche Börse

"The TraderEx simulation software very much succeeds in capturing the dynamics of trading in today's fast moving markets. A number of us at ISE, including me, have used it, found it most informative, and are very pleased to see it being made available with this excellent book."
Gary Katz, President and CEO, International Securities Exchange

"This book covers every major aspect of today's electronic markets of importance to a trader. Auctions, order books, dealer markets, and dark pools are all treated with the depth and insight that reflect the authors' deep knowledge and understanding of modern equity trading. The TraderEx course will challenge, intrigue, and reward those who successfully master its principles and concepts."
Frank Hatheway, Chief Economist, NASDAQ OMX Group, Inc.

"TraderEx is a fantastic hands-on tool that brings electronic trading to?life without the risk of losing your shirt! From the experienced trader to?the student of market structure, TraderEx simulations are as addictive to?play as they are educational. Only TraderEx has the most current market?models and trading strategies that are being used right now in today's?marketplace. The simulations are TraderEx's, but the awesome experience and?insight are all yours!"
James Ross, Vice President, NYSE Crossings, NYSE Euronext

Mastering the Art of Equity Trading Through Simulation is a guidebook to interactive computer trading simulation designed to provide hands-on experience in making tactical decisions and implementing them in different market structures—from continuous order-driven markets and call auction markets to quote-driven dealer markets and negotiated block markets. Part One establishes a background on trading and markets from an economic perspective and provides an overview of the simulation model and TraderEx software. Part Two then presents a sequence of exercises in which you will trade in different market environments created by the TraderEx software and its settings. By showing you how to operate in these different environments, you'll quickly discover a good deal about what trading involves and how market design impacts trading decisions.

Don't forget to pick up the companion to this book—Micro Markets: A Market Structure Approach to Microeconomic Analysis. It includes a computer simulation exercise that can be undertaken with the TraderEx software.

Robert A. Schwartz is Marvin M. Speiser Professor of Finance and University Distinguished Professor in the Zicklin School of Business, Baruch College, CUNY. He is the developer, with Bruce Weber and Gregory Sipress, of the trading and market structure simulation, TraderEx.

Gregory M. Sipress is the head of software development at TraderEx, LLC.

Bruce W. Weber is a Professor of Information Management at the London Business School.

Foreword (Professor Dr. Reto Francioni).


How TraderEx Works.

Who This Book is For.

Overview of the Book.

Downloading the TraderEx Software.

How TraderEx Works with Micro Markets.


Part One: An Overview of Equity Market Trading.

Chapter 1: Equity Market Trading.

The Costs of Trading.


Market Structure.

Informational Efficiency (or the Lack Thereof).


The Players.


Chapter 2: Simulation as a Learning Tool.

Canned versus Computer Generated Prices and Quotes.

Appendix: Intertemporal Returns Correlation.


Chapter 3: How to Use TraderEx.

An Overview of the TraderEx Environment.

The Continuous Order Book Market.

The Dealer Market.

Call Auctions.

Block Trading Facility.

Crossing Network.

Hybrid Markets.


Chapter 4: Introduction to the Trading Exercises.

The Buy-Side Perspective.

The Sell-Side Intermediary Perspective.

TraderEx Performance Measures.


Part Two: TraderEx Exercises.

Chapter 5: Microeconomics Goes to Market.

Exercise 5.1: The Look of a Financial Market.

Exercise 5.2: What Are Your Attitudes Toward Risk?

Exercise 5.3: Call Market Trading.

Exercise 5.4: Trading Costs in Action.

Exercise 5.5: Dealer Costs and Inventory Control.

Exercise 5.6: Inter-Market Competition for a Stock Exchange.

Exercise 5.7: Finding an Equilibrium Value.

Exercise 5.8: Economic Effects of an Order Protection Rule.


Chapter 6: The Order Book Market Structure.

Exercise 6.1: Entering Limit Orders.

Exercise 6.2: Entering Market Orders.

Exercise 6.3: Adjusting Limit Orders.

Exercise 6.4: Sizing your Orders – Markets and Limits.

Exercise 6.5: Post-Trade Analysis.

Exercise 6.6: A Really Big Order.

Exercise 6.8: Illiquidity.

Exercise 6.9: Heightened Volatility.

Exercise 6.10: News and Changing Expectations.

Exercise 6.11: Endogenous Expectations.

Exercise 6.12: A One-Year Holding Period.

Exercise 6.13: Crossing Networks.

Exercise 6.14: A Networked Simulation.


Chapter 7: The Call Auction Market Structure.

The Price Setting Mechanism in TraderEx Call Auctions.

Exercise 7.1: Mechanics of the Opening Call Auction.

Exercise 7.2: Your TraderEx Call Auction Orders.

Exercise 7.3: Your Influence on TraderEx Call Auction Prices.

Exercise 7.4: Participating in the Opening Call Auction.

Exercise 7.5: Working a Large Order with Call Auctions.

Exercise 7.6: Proprietary Trading with Call Auction, and News Releases.

Exercise 7.7: Emphasizing Different Dimensions of Trading Performance.

Exercise 7.8: A Partially Disclosed Call Auction.


Chapter 8: Dealer Markets: What Do the Trading Intermediaries Do?

Operations of Quote Driven Markets.

Exercise 8.1: Changing Quotes to Control Your Inventory.

Exercise 8.2: Market Maker Performance.

Exercise 8.3: Market Maker Risk Performance.

Exercise 8.4: Preferencing in Market Maker Systems.

Exercise 8.5: Volatility and Market Making.

Exercise 8.6: Low Liquidity and Market Making.

Exercise 8.7: Alternative Trading Systems and Market Making.


Chapter 9: Dark Pools: How Undisclosed Liquidity Works.

Exercise 9.1: Mechanics of the Dark Pool.

Exercise 9.2: Seeking Advantages from Dark Pool Pricing.

Exercise 9.3: Working a Large Order with a Dark Pool.

Exercise 9.4: Proprietary Trading with Call Auction, and News Releases.

Exercise 9.5: Emphasizing Different Dimensions of Trading Performance.

Exercise 9.6: Dark Pools and Trade-Through Rules.


About the Authors.