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CHAPTER 1: INTERACTIVE FTS CASES

Interactive FTS

In an interactive FTS trading exercises you are part of the market's trading crowd.  You learn how to apply the concepts in BondTutor from personal trading experience.  In each FTS trading case the learning objectives are tied to the price discovery problem.  For example, the initial cases emphasize the time value of money and market microstructure.

To start you are encouraged to try out the online interactive demonstration.  This data is from an actual class of students and you can compete against them.  You have an advantage because you can adjust your trading strategy whereas the class you are competing against is a replay and so cannot adjust their trading behavior. 

To get going (using either a Windows PC or a Mac) click on:

Important Note: To run the FTS Interactive Trader you need port number 4502 open.  If your firewall blocks this port then you will need to skip this next link.

 The FTS Interactive Trader

Once the FTS Interactive trader is loaded click on the button "Connect to Demo."
Note:  The demonstration trading case is B02 which is introduced in Chapter 2, section 2.6 titled Interactive Cases.  This demonstration illustrates the screen elements, the market microstrucutre as well as the dynamics of a FTS interactive trading exercise.

Schools can contact fts@ftsweb.com for details as to how to get your classes up and running and competing in a rice discovery trading exercise.

 

The Trading Screen

Market Microstructure:

The problem facing the market is to discover the prices of these two securities as the market moves through time with three trading periods.  Period 1 is day 1 of year 1, Period 2 is day 1 of year 2, and Period 3 is day 1 of year 3. 

Trading is under the rules of the continuous double auction institution.  That is, unfilled bids are continuously ranked from highest to lowest in the market book and unflilled Asks are continuously ranked from lowest to highest in the market book.  There are three types of trades supported:

1.  Market making limit order.  For this order you submit a Bid to buy some quantity at your specified price or an Ask to sell some quantity at your specified price.  This order type appears in the book in the top RHS of the above screen dump.

2.  Market order.  For this order you are a market taker and submit a quantity to buy from an existing Ask or sell to an existing Bid.  The latest Market order transaction appear under last in the top LHS of the above screen dump.

3.  Market limit order.  For this order you are a market taker  and you submit a limiting price and a quantity.  That is, for a market limit buy order you are attempting to buy from the best Ask so long as it is not higher than the price you submit.  A market limit sell order attemtps to sell to best Bid so long as it is not lower than the price you submit.  This would also appear under Last in the above screen dump if a market limit order was the most recent transaction.

In the above you can be either of two types of traders.  A market maker who attempts to earn the spread but cannot control execution, or a market taker who pays the spread but controls execution.  In the real world the market makers are the primary dealers who can make market in Government securities.

Long and Short Positions

Your current position in a security appears as either a positive or negative number under Position in the above screen. 

Suppose you buy 10 coupon bonds and hold them then at the end of each year your cash account is credited with 10*$Coupon payment and at the end of .three year's you receive 10*$Coupon payment + 10 *Face Value.  Each period the cash earned will earn interest in your money market.  At the time of purchase your money market cash amount is reduced by 10*Purchase Price. 

You can also sell bonds that you do not own!  This is known as short selling.  Suppose you short 10 bonds you do  not currently own and maintain this short position.  Now you receive in your cash account 10*$Selling price but at the end of each year you must cover the cash payments from the 10-bonds.  That is,at the end of year 1 10*$coupon payment is subtracted from your account, etc., and at end of year 3 (10*$coupon payment  + 10*$Face Amount) is automatically subtraqcted from your money market account.

If you are short any security then under Positions above this would displayed as a negative number.

In your money market account you can borrow or lend and if you borrow you pay the money market rate in interest at the end of each year and vice versa if you lend.

By running through the interactive demo above you will get to experience the actual dynamics of the market.

Exercise 1:  Trading Case B01

Case Objective

To understand the time value of money; to understand the cash flows from coupon and zero coupon bonds; to apply the discounting formula to value such bonds.

To master the operational details associated with trading bonds in a continuous double auction institution -- the form used in the real world secondary trading markets.  The Primary dealers are the market makers and the retail general investing public are the market takers.  In this case you get to play both roles -- Primary dealer as well as retail investor.

Key Concepts

Time value of money; discounting; determining bond prices given interest rates.

Textbook Integration:  Background Reading

Section 1.2 Present Value and inparticular read the Three Period Example.  In B01 this type of financial problem faces the trading crowd in a market.  That is, traders are buying and selling fixed income securities with the objective making money.  In the next chapter of Bond Tutor you will learn the finer points associated with bond pricing.

The rules that govern trading in the market are referred to as the market microstructure and these rules are briefly described above and for additional details click on market microstructure. .

Instructor References for the FTS Interactive Markets

Instructors can contact fts@ftsweb.com for additional details regarding how you can get your class up and running with B01 and related bond trading cases.

Overview of FTS Interactive Markets

Teaching Guide