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Queen Mary Academy

Using a real-world trading environment to improve the understanding of concepts in financial mathematics

A group of students sitting at their computers

Dr Melania Nica

Senior Lecturer in Actuarial Science

In the module ‘Mathematical Tools for Asset Management’, students learn about financial models for asset pricing, trading, and portfolio construction. A simulated trading platform helps them to engage with the actions required to implement the principles in practice.

Responding to a need

Students often find it difficult to connect theory with practice and are therefore unable to fully integrate the concepts that are applicable across broad parts of the curriculum, and which are required to success in the job market. Therefore, the challenges and the opportunities are multi-faceted, ultimately linking to progression and career outcomes. Students in mathematics work with algorithms to solve problems, but don’t always understand how they can use what they learned outside the specific context. In financial and actuarial roles, this can be a disadvantage. Also, it makes it difficult for them to absorb more complex concepts in, for example, risk management, when they haven’t understood the mechanics of the markets and the actions taken by market participants.

Approach used

Students in this third-year undergraduate module come from several programmes including mathematics, statistics, and actuarial science. They have a varying knowledge/awareness of financial markets, although they have all taken some introductory modules in financial mathematics. Thus, the derivation of asset pricing models, for example, is relatively easy to follow for such students. However, when I challenge them on explaining what exactly the equations signify (e.g., what a negative weight in an asset might mean in practice), I find them struggling. This is despite them knowing how to define it when asked directly (i.e., short selling).

Apart from the conceptual challenge, I also found that they often express a desire to pursue careers in financial trading, but do not know what is involved in finding information, investing in assets, assessing performance, etc.

To resolve the gaps, I have obtained an education account (free of charge) with a global online brokerage firm (Interactive Brokers - IBKR). Using this account, I can invite students to create individual accounts, while I can monitor and manage the accounts. These accounts are simulated versions of the live trading accounts. The students:

  • download and install the standard trading platform (software)
  • have access to market data and a huge range of securities and markets, in which they can trade (the data is delayed by a few minutes compared to live accounts)
  • are initially endowed with USD 1 million in ‘paper money’, which they can use to trade stocks, derivatives, and even cryptocurrencies
  • can place a range of order types (e.g. market orders, limit orders, good till cancelled orders, etc.)

Trading records are based on actual market prices and simulated execution in line with market conditions, providing a highly realistic experience.

The trading platform was also installed in the School computer lab with the assistance of IT Services, who I placed in direct contact with the Interactive Brokers team, to ensure that university IT security policies and controls were properly implemented.

During the lectures, apart from explaining different ideas, I demonstrated concepts by logging in to the brokerage platform and showing students how it worked. More importantly, I gave students the freedom and opportunity to explore the platform and related resources by themselves. To address any questions they may have or resolve any hesitation on their part, I organised a workshop for students during Week 7 (when there were no lectures). During the interactive workshop, I was able to cater to a range of student interests, from researching stocks, to constructing trading strategies.

In addition, I encouraged students to share their experience and portfolio performance. As an added incentive, I offered them the opportunity to include chosen aspects of their individual (simulated) portfolios in their take-home assessments.

Impact

The most resonant impact for me on a personal level was the look of recognition on students’ faces when they, e.g, took a short position (negative weight) in an asset for the first time, or learned more about a company they were interested in.

The module learning objectives include an understanding of financial investment strategies, and how investors choose their portfolios. Towards these objectives, I observed an improvement in the quality of assessment submissions, reflecting a more nuanced and sophisticated understanding of the material. The majority of students prior to the class did not know how to research stocks or download price histories. However, after exposure to the trading exercises, they scored an average of 99% on the assessment question that required them to research their individualised real-world stock portfolios.  Compared to this the overall average of the assessment was 73%, which is at the usual level for this module.  Similarly in the final exam, students performed systematically better in the sub-questions that were based on stock risk exposures. While students typically find such questions more challenging, they scored 73% and 89% on average in the two sub-questions that required this reasoning, while the overall question average was 63%. These scores show that students surprisingly performed better than their overall average in the topics where they were exposed to real-world applications, despite these being typically the underperforming section of the module coverage.

In terms of direct feedback, the IBKR sessions were appreciated in the module surveys (early and final). Apart from directly referencing IBKR, students generally appreciated the module more. For example, one student wrote: “Dr Melania Nica is one of the best lecturer I have throughout my study at Queen Mary. She is very enthusiastic and she cares about her students. She organize things outside or lectures to help her students both academically and for career". 

The approach was well received, so it was adopted at the School wide level as an employability activity under the Industrial Insight seminars. Thus, the benefit of the activity far exceeded my original goal of improving understanding, potentially even inspiring students to become more curious about applying their education to this subject.

Recommendations

There are a range of settings where simulated activities can be implemented. When these connect to truly noisy real-world environments (where not everything works like in the textbook), it can be rewarding for both educators and students to engage with it.

Over 150 students have now requested individual accounts to practice their portfolios, reflecting ongoing interest. If implementing such an activity, I suggest you do not underestimate the background/setup effort, as even a simple act like assigning trading accounts and monitoring engagement can be time consuming. Thus, I would suggest using these activities where they genuinely add a dimension to the specific module content, and not simply for gamification and engagement purposes.

I attended today’s industry insight talk, Introduction to Simulated Trading, and I wanted to thank you for the insightful and engaging session. Both my sister and I are eager to learn how to trade, and your presentation has further strengthened our resolve to begin this journey!
— Student

No such formatter

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