FM: Talk about the annual trading competition. How did the idea come about and how has it evolved?
JL: It was watching the students participate in other trading competitions. They had a negative reaction to the way other competitions were being offered. They recognized that the only thing that they were going to be judged by was their P/L…. they would see that other schools were using game theory, which was 'Hey, I have two teams in the competition, one team go long the maximum contracts and the other go short the maximum contracts," and at the end of the day, one will be at the top and the other at the bottom. It went from managing a portfolio or making good solid trading decisions and bringing them forth, to really what looked like a bar fight. It had no comparison to the types of skills and traits that recruiters would want to have in their company. And that was the reaction I was getting from the recruiters: "This isn't the kind of behavior we want to encourage in our firms."
I sat down with my technology partners and said we want to do something different, and [we] strategized on the best way to go about [it]. What are the skills and traits of the best traders? We clearly wanted to see who could perform in a risk-adjusted environment.
So that became Round 1. Providing people with the Thomson Reuters platform and Trading Technologies platform on their own laptops for two weeks and all the training that came behind it was a huge investment by those firms. It became interesting to see where and how you were able to be effective in conducting a true competition because the level of knowledge of the other schools was relatively low in terms of energy fundamentals and what was going on in the markets. A lot of students were very resourceful in that they were making calls to the trading desks of all these firms and asking them to provide guidance to them during the trading competition. It was funny because one of the traders on one of the big energy bank desks was a good friend of mine and he said, "Joe I wanted to let you know I have been contacted by three schools to see if I would help them in their trading competition by giving them advice as to what to do, and I wanted to call you first to see how you feel about that." I said the first thing they have to learn is who not to listen to. After about 15 minutes of laughing he said, "That is a good point." I said, "Help them all you want and if it helps them, then great — they will come back to you later for advice; if it doesn't help them, they know not to call you back."
I have a pretty strong approach to trading, [which] is identifying the best traders a lot more than identifying who can make the most money in one day. Each firm has their own recipe of what makes the best trader so we decided [to have] the students present their strategy and [describe] it in a minute or less, to [say] "here is what I am going to do."
The judges were so engaged that they walked up to every trader while they were trading and remembered their strategy and asked them to tell them: "What are you looking at, what are you thinking about? You are up, you are down, what happened? You missed this move, what were you thinking at that time?" And [they would] listen to how the students respond. And then at the end to have all the results of all the different metrics that you could possibly look at and have you have to tell the judges what was your comparison of the strategy from what the results were. They pinged them with questions and then ranked the students. Based on that, you had the collected opinion of [at least] 30 top-ranked managing directors, senior vice presidents, real traders [to] decide who they thought would be the overall best trader coming out of the competition. It was never the person who just made the most money. The feedback to the students was tremendous. They learned that in order to get capital to be able to trade and be effective you have to have more than just being lucky.
The real characteristic that most people are looking for and we try and encourage at the school is that I don't want to create a breed of student that think that they need to be smarter than the market. I need them to be prepared to be wrong two-thirds of the time and it is how they manage being wrong and how they manage being right that makes them effective.
Once you start thinking you are smarter than the market, you put pride in your trade, then you won't get out of a bad trade. It takes time for them to recognize that that is what they were doing. They start praying, rubbing the head of a troll doll, and we try to break them of it. You can do that only with experience.
Our students started participating in other university-based trading competitions where [they] were rewarded only for having made the most money, regardless of the risk they exposed themselves to. Recruiters that sponsored these events were not pleased with the "winners" as they did not possess the skills and attributes of their view of a "successful" trader.
In fact, energy companies are trading to reduce the commodity price risk that their respective firms have exposed their long-lived capital investments to. At the same time, energy investment banks and proprietary trading firms run their trading operations based upon risk/return metrics and have developed keen methods of defining the attributes of a successful trader.
So, we set out to develop a university-based trading competition that:
- Was risk-adjusted
- Had live/simulated trading
- Featured a combination of methods of determining the "Best Traders"
As such, we created the Tulane Energy Trading Competition which was structured as follows:
- Remote Round — Open to 100 2-person teams from major universities. This round:
a. Real market tools & live markets
i. Thomson Reuters & Trading Technology licenses & training provided to each team
ii. Trade Live Crude & Natural Gas futures markets
b.Risk-adjusted returns used to rank results
i. We used the Peter Martin Ulcer-index as a start and ultimately created the Tulane Energy Index that effectively penalizes students for a combination of position drawdowns AS WELL AS for significant market moves that the traders DID NOT participate in
- Final Round — Top 14 teams (28 students) from Remote Round invited. This round:
a. Simulated trading rounds
b. 30+ executive judges to decide (vote) on top traders based on:
i. Pre-trading 1-minute presentations by students on their strategies
ii. Trading results — however the judges decide these results helps decide the traders' [overall] skills
iii. Post-trading 1-minute presentations that reconcile their strategies vs. performance
iv. Judges interact with the students all day while trading
- Students are provided with direct feedback on the true skills and attributes [that] the market is looking for.
- Judges get the opportunity to meet the students and often recruit them.
- Tulane gets tremendous feedback on items/concepts from the judges on how to keep the program cutting-edge.
- Winners receive more than $400,000 in software, data and cash.
- Everyone has fun.