Last updated on Tuesday August 20, 2024 2:09 PM
Most finance courses describe how securities are defined, valued and used. This course is about how securities are traded: the design, operation and regulation of trading processes, mechanisms and protocols. Today's markets for stocks, bonds, derivatives and cryptocurrencies vary in sophistication and complexity. For some securities, markets have evolved to anonymous networks that are fast, widely accessible, and transparent. We also have markets where a few traders act as "dealers". In these markets, reputations and relationships are important. Some trading mechanisms are new (the open electronic limit order book); some are as old as antiquity (the single-price call auction). We have a general sense that all markets are heading toward some sort of electronic future, but the progress toward this goal is rough and uneven. Our markets are infused with tensions between efficiency and fairness, competition and regulation, consolidation and fragmentation, speed and stability, and so on. The course is based on a realistic picture of the trading process, so we go into a fair amount of insitutional detail, as well as some law and market regulation. The intellectual framework for the material comes from mainstream economics, financial economics, and the subfield of financial economics known as market microstructure.
Classes are in-person and attendence is required. I usually make powerpoint handouts available on Brightspace prior to the class. I also make available the class videos (subject to everything working on the technical side).
There will be a midterm and a final exam. Both are in-class, closed-book and closed-notes. During exams, use of cell phones, tablets, laptops and similar devices is strictly prohibited. Both exams will be a mix of multiple choice and short-answer/essay problems covering material from class sessions, readings, and trading exercises. Note: The final exam period runs through Friday, December 20. The NYU registrar sets the final schedule within this window, and it is not flexible. Do not make travel plans that might conflict with this schedule. In addition to the exams there will be five or six trading exercises.
In each trading exercise, you'll assume the role of some type of trader (a dealer, an information trader, a hedger, an arbitrageur, for example). You'll buy and sell securities in a market populated by you, your classmates, me (sometimes), and simulated traders.
Most of the exercises will use the Rotman Interactive Trader (RIT) system. The market resides on an RIT server. You'll access the market via the RIT client, which runs locally (on your own computer). The client simulates a very realistic trading interface, similar to what you might get from an institutional or sophisticated retail broker. If you want an advance look at the client, go to https://rit.rotman.utoronto.ca/ and then to the "Demo" page.
Each RIT exercise will run continuously for several days: you can trade in multiple sessions (as many as you like). The runs are scored on profits, hedging error, and so forth, depending on your role in the market. The scoring usually works like this. You can get a passing grade (75%) simply by playing three times. Then I factor in the average of your three best runs.
The trading exercises are simulations designed to illustrate how markets work, and to allow you to successfully act out your designated role. It is not difficult to make (simulated) profits in these exercises. Real markets are much less forgiving. Their workings are often unclear; they are populated by traders who are trying to make money at our expense; and even traders who make money are running large risks. I can't teach you how to be lucky.
The overall grade weightings will be (approximately) 40% midterm, 45% final, 15% on the trading exercises. These weights are approximate; they might vary by 5%. Final course grades are subject to the departmental grading standards given below.
Material required/recommended by the Stern School/New York University is an essential part of this syllabus. The current Stern/NYU statement is: Syllabi Required Sections and Suggested Language Spring 2023 Grad and UC.docx.
In the Stern/NYU policy statement, the section on grading guidelines states, "At NYU Stern, we strive to create courses that challenge students intellectually and that meet the Stern standards of academic excellence. To ensure fairness and clarity of grading, the Stern faculty have agreed that for elective courses the individual instructor or department is responsible for determining reasonable grading guidelines." The Stern Finance Department's own grading guidelines set the following:
MEMORANDUM
TO: Finance Faculty (regular, visiting, and adjunct faculty, and instructors)
FROM: David Yermack, Finance Dept. Chair; Manjiree Jog, Finance Dept. Deputy Chair, and Anothony Lynch, Finance Dept. Undergraduate Program Coordinator
DATE: April 15, 2022
SUBJECT: Suggested Undergraduate Grading Standards for the Department of Finance
This memo lays out the Department of Finance policy on suggested grading standards in the undergraduate program that have been in place for more than 20 years, with certain refinements and clarifications.
Our reputation depends in part on the ability of prospective employers to quickly ascertain that a student really understands financial theory and practice, and has the technical capability to use the tools learned in finance courses. It is part of your responsibility as a faculty member at New York University to evaluate student understanding of the materials in your course with examinations or written assignments that are sufficiently demanding to reveal differential performance.
For the core course, Foundations of Finance, for sections with enrollments of more than 25 students, we expect that approximately 35% of students will receive an A or A- grade. This policy is identical to the Stern School guidelines for grading in undergraduate core courses.
For elective courses, the Stern faculty has agreed that the individual instructor or department is responsible for determining reasonable grading guidelines. The Department of Finance guidelines are that instructors should award grades of A or A- to approximately 35% of students in these courses as well.
Within the “A range” of 35% for both core courses and elective courses, we would expect the number of A- grades to be at least equal to if not more than the number of straight A grades, in a proportion such as 15% A’s and 20% A-’s, with the understanding that instructors will be attentive to the “bunching” of grades so that students with nearly identical performance will receive the same letter grades. At times, student performance, small course enrollments, or bunching of grades may warrant some variation in the fraction of A/A- grades awarded. However, they should never exceed 50%. We expect that those cases in which faculty exercise discretion to award more A/A- grades than usual will be offset by other cases in which they award fewer than usual.
The remaining grades should be awarded mostly in the “B range,” with an expectation that approximately 60% of the students will receive some type of B. Grades should be distributed fairly equally between the B+, B, and B- subgroups, with the straight B grades ordinarily being the most numerous.
For students who perform significantly below most of the class, grades of C+, C, C-, D, and F are appropriate. We would expect approximately 5% of the grades in larger sections to fall into this range and encourage instructors to take account of noticeable separations in performance when differentiating the grades awarded to individual students.