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Introduction to Exchanges

Introduction to Exchanges. Chris Welty Walleye Trading. Who is this guy?. Walleye Trading. Hedge fund in Wayzata Quantitative focus ~35 employees. Exchanges. What they are Growth Quantitative Finance. History. 1602 Amsterdam Stock Exchange 1730 Dojima Rice Exchange

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Introduction to Exchanges

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  1. Introduction to Exchanges Chris Welty Walleye Trading

  2. Who is this guy?

  3. Walleye Trading • Hedge fund in Wayzata • Quantitative focus • ~35 employees

  4. Exchanges • What they are • Growth • Quantitative Finance

  5. History • 1602 Amsterdam Stock Exchange • 1730 Dojima Rice Exchange • 1973 Chicago Board Options Exchange

  6. Why trade on an exchange? • Standardization • Liquidity • Information • Credit • Efficiency

  7. Executing a trade

  8. Increasing Computerization

  9. Match Buyers and Sellers

  10. Who Does What Customer Broker Exchange Market Maker

  11. Broker • Accepts orders • Executes orders • Custodian • Credit intermediation

  12. Market Maker • Provide prices • Provide liquidity • Sometimes, stabilize market

  13. Market Stabilization • NYSE Specialist • Japanese • Price limits • Position limits

  14. Increasing Quantitative Trading • Stocks • Foreign Exchange • Futures • Options

  15. Leads to massive growth

  16. NYSE Volume

  17. Market Growth • Reduced commissions • Penny pricing • Quantitative trading

  18. Quantitative Finance • Option Modeling • Automated Trading

  19. Black-Scholes Model • Useful • Not Practical

  20. Black-Scholes Price

  21. Black-Scholes Delta

  22. Gamma

  23. Rho (interest rate risk)

  24. Model Enhancements • Discrete dividends • Different interest rates • Variable volatility • Smile • Term structure • Proprietary

  25. Automated Trading • Algorithmic Execution • Low-Frequency • High-frequency

  26. Algorithmic Execution • VWAP • Minimize trading cost • Reduce information leakage

  27. Low Frequency Trading • Statistical Arbitrage • Quantitative-based fundamental trading

  28. High Frequency Trading • Hot new area • Enabled by electronic trading • Analysis of large data sets

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