Today’s Technology lets you accelerate the learning process by fusing together “learning” and “doing.” The FTS Real Time trading client has been uniquely designed to make this happen. In this write-up we illustrate how in relation to some of the deep ideas that underlie the concept Market Efficiency.
Background: Two objectives underlie this exercise. First, to gain a basic familiarity with some of the main components in the FTS Real Time Client software. Second, to gain a deeper understanding of some of the ideas that are central to the Efficient Market's Hypothesis (EMH).
Later, in other topics of this help file you will see how this approach extends to major concepts in finance such as the time value of money, diversification, arbitrage and valuation.
Session 1:
Learning Objective is to
familiarize yourself with today’s financial market environment.
I.
Stock Quotes and Market Sentiment
Run the fts real time trader client. The initial screen contains a floating quote window that flashes red/green colors if opened during trading hours. Green reflects an uptick (the bid/ask or last whichever cell you are looking at just increased in price and vice versa for a downtick). At a glance by watching this for a few minutes you can see the current market’s sentiment.
Aside: In the FTS system all trades are executed at the most recent real time price but the bids/asks displayed in the quote window are indicative only due to restrictions on broadcasting real time prices. The color codes are accurate plus you can usually obtain the current real time prices for the securities you are looking at by clicking on the security ticker in the Quote window. This will bring up the current market in the top Right Hand Side (RHS) of the screen --- these prices are real time for stocks.
Question: What is the current market sentiment? – for the market as a whole?, for a particular security that you have an interest in?
Does this sentiment reflect the current news in the market?
To answer the above questions consider available news in the market.
II.
Financial Market Information
In the top RHS of the screen there are a numbers of preset web links. To get general information available for the market, click on one of the Indexes at the top of the Quote window. This brings up general links to: Charts, News and the Economy. To get security specific information click on the security ticker to get available information for that security. At the top for a stock you will see: News, News/Charts, Beta/Dividend, Earnings News, Earnings Forecasts, Fundamentals, and SEC (filings with the SEC 10K etc.,). Quickly you will see that in today’s financial market environment there is a rich set of real time information available about any security.
Q.
Suppose the market is inefficient with respect to some of this publicly
available information what type of trade would you like to make?
Aside: Inefficient can be interpreted in many ways and each way would lead to a different type of trade. This is important for understanding the arbitrage arguments that underlie this hypothesis.
For example, suppose you think the market has over reacted to either good or bad news? Suppose the market has reacted slowly to the good or bad news? Suppose the market responds quickly to new good or bad news but in a biased manner? Suppose you expect that a large amount of trade will go through at the closing price for the day – what position would you take during the day?
To act on your answer(s) to the above question you need to translate your understanding of "inefficient" into some trading strategy which is executed at current real time prices. In this way you will gain a deeper appreciation of the strengths and weaknesses of the traditional tests of the EMH. The next section demonstrates how to trade with real time execution using the FTS real time client.
III. Trade Window
Just as the top Right Hand (RH) window links current information to the security ticker you clicked on in the Quote window, the bottom Left Hand (LH) window links trading to the security ticker you clicked on in the quote window.
First, you will discover that not all securities can be traded. For example you cannot directly trade a stock index. In some cases you will have an ETF (Exchange Traded Fund) available to trade. This is a security that is designed to mimic an index such as the “SPY” mimics the S&P500 index and the “DIA” mimics the DJIA index. For this current exercise click on a ticker in the floating Quote window that you can trade. In the bottom LH window you can make the following types of trades (for a stock): Cash Purchase, Cash Sale, Margin Purchase, Margin Sale, Short Sale and Short Cover. For now we will work with cash purchases and cash sales only. In later sessions you can learn finer points associated with the market’s microstructure.
Suppose in answering the questions in part II. above you form the view that you would like to buy 100 shares of a large stock such as IBM. You would first click on IBM’s ticker in the (floating) Quote window then select Cash Purchase from the drop down in the bottom LH window and enter 100 in Quantity to Buy text box. Finally, click on Submit Order. In the top LH part of the screen you will see a message and then a few seconds later a conformation message that your trade was executed.
Q.
Now that you have bought or sold some stock did you make or lose money?
IV.
Performance Reports
Immediately above the trade window you will see a general report window. You can either scroll across to see the Gains/Losses you are currently making or you can make this part of the screen wider by grabbing with your cursor the RH side of the Report window. But now you will be able to read off your average cost (if you have made several purchases of the same stock), total cost and gains/losses etc.,.
Q. If you log back after the market closes you can check whether or not you did better by trading during the day compared to just buying or selling at the market close.
What have you
learned?
The above set of exercises are designed to provide you with a quick introduction to both the Real Time Trader client and to the Financial Markets. There are many finer points, including the important concepts that you will learn and the institutional details associated with the financial markets (the market microstructure). The software is designed to take you as far as you would like to go down these paths by doing. However, you should first repeat the above exercises a few times to reinforce your initial understanding of today's financial markets.