Class:
COMS W4995-3
Technology
& Financial Markets: Financial Technology
Columbia
University
Fall
2009
Class: Wednesday, 6:10pm-8:00pm
Location: 825 Mudd,
Columbia University
Instructor:
Dr. Gitanjali M. Swamy
Office Location: 464 Mudd,
Columbia University
Office Hours: Wednesday 3-5pm, 464 MuddEmail: @gmswamy@cal.berkeley.edu-or-@gms2155@columbia.edu
TA:
Anureet Dhillon
Office: 122 Mudd,
Columbia University
Office Hours: Tuesday 1030am-1230pm, TA Room
Email: -@ad2660@columbia.edu
This
course is intended to introduce students to the technology that make financial
markets function in today’s economy. The key takeaway is that without its
technology, the finance industry could not exist today and the technology
function is far more pivotal in finance than in any other industry vertical.
Technology has changed the basic process of investment, financing and payout
decisions of firms as well as saving and investment decisions of individuals.
It is expected that by the end of the course students will have a clearer
understanding of the inter-relationship between technology, the financial
markets and the overall economy.
We
begin with an overview of technological and mathematical methods used in
financial markets and their analogous use in other engineering disciplines. In
the second section we will study retail payments, fulfillment and the
corresponding solutions provided by interchange and security players. We will
study the entrance of technologies like RF communication and mobile phones into
financial payment systems. The third section will study public markets, B2N/B2C
exchanges and the design considerations in such systems. The section will link
the trading of stocks, bonds and other high volume instruments to the
technology and infrastructure required to make it possible. The section will
also examine the historical evolution and the pivotal role of technology. It
will then delve basic option pricing and development of valuation models. It
will then compare those techniques with traditional engineering
algorithms/analysis for problems like game theory and the heat flow equation.
Finally, it will translate those techniques into technological infrastructure
required to support the models. The fourth section will cover private markets
and rating systems. This section will examine network theory for communications
and link it with network theory in the valuation of illiquid sectors like
venture capital. We will examine the valuation of illiquid assets
(private companies, tulips and domain names), intermediation and the technology
that makes it possible. It will cover the basic algorithmic techniques for
private market valuation and the technological evolution path for these
markets.
The
fifth section will cover financial products with different payoff such as
insurance. As part of this section we will cover the probabilistic models
associated with calculation of insurance pricing, actuarial tables etc.The
sixth section will deal with the Internet and its impact on financial
markets. We will examine the Google effect, i.e. the creation of
virtual universes and adaptive knowledge sharing. The Internet makes it
possible for virtual financial markets to take-over the role of traditional
real markets. The section will examine internet tools that are available to the
retail consumer today that in effect creating new markets and customers.
We will conclude with the future impact of internet social networking on
financial valuation and examine the emergence of new business models for
finance. The final section summarizes the key lessons learned and the
hypothesis on the future.
Course
Overview
This course will use a combination of
analytic and case based pedagogy. Many of the sections will be covered by guest
lecturers who have built the systems under discussion. The course will
introduce a wide variety of financial tools ranging from Bloomberg, CapitalIQ,
VentureXpert,
Moody’s and Aarm.
The final exercise will consist of a paper that either uses the suite of tools
to solve a financial problem in a new way or design of a technology that could
change financial business models.
Prior
Project
In order to give you an idea about the type of
projects and their content, please refer to last year’s project reports by clicking here.
Teaching
Schedule
Shedule
|
Date |
|
Lecture |
Cases/Reading |
|
|
|
09/09/2009 |
|
Part I: Course Overview ·
Course, grading and the case method. ·
Explaining the case method ·
Case summary due after the class ·
Course graded on case participation, case summary, pop quizzes and final
project Overview of methods
|
None |
|
Instructor |
|
09/16/2009 |
|
Part I: World of
Financial Systems ·
Origins ·
Transactions ·
Exchanges ·
Systems ·
Size
and Shape of Space ·
Examples Part II: The Money
Game |
None |
|
Instructor |
|
09/23/2009 |
|
Part
I: History of Finance · Arbitrage · Market Players Part II: Project – Financial Systems |
None |
|
|
|
09/30/2009 |
|
Part I: Introduction to Public
Markets ·
Exchanges ·
Players ·
Transactions ·
History
of IT and Financial Service Part II: Case Discussion Nasdaq |
Nasdaq |
|
Instructor |
|
10/07/2009 |
|
Part
I: Private Markets and Rating Systems: Technology for Illiquid assets ·
Valuation
of Illiquid Assets ·
Rating
Systems and ANN’s ·
Structured Products ·
Private market valuation and technology Part II: Case Discussion |
Morningstar |
|
TBD |
|
10/14/2009 |
|
Part I: Public Markets ·
The
Evolution of IT in Financial Services ·
Sales
vs. Quants vs. Engineers ·
The
Future of IT Part II: Case Discussion Nasdaq |
Nasdaq-Japan |
|
George Tillmann, Former CIO and Partner Financial/Information
Technology, Booz Allen & Hamilton |
|
10/21/2009 |
|
Part
I: New Financial Products ·
New
Products: Derivatives and Synthetics ·
Credit
Derivatives ·
Managing
Risk ·
Crashes
and Failure ·
Enterprise
Risk Management Part
II: Case discussion |
Lehman and Amex
Securitization |
|
Lars Toomre, Former
Managing Director, Head of Fixed Income, Mortgages at UBS, Smith Barney,
American RE and Senior Vice President,
Fixed Income, Lehman. |
|
10/28/2009 |
|
Part I: Crisis and Market Crashes ·
Options ·
Arbitrage
and Leverage ·
Trading
Strategies and IT Requirements ·
Behavior
in a Crash and IT Requirements ·
Understanding
Black Swan Strategies and IT – Shut
down or be Overactive Part II: Case discussion |
Long Term Capital Management(A),
(B), (C) |
|
Ashutosh Joglekar, Executive Director, Technology, JP
Morgan-Chase and former head of IT, Long Term Capital Management |
|
11/04/2009 |
|
Part I: Retail
exchanges and payments ·
Payment
systems – Checkpoint, Verisign ·
RFID,
Mobile and the future of financial payments ·
The
Future of retail and banking .
Part II: Case
discussion: |
Li Fung &
Co |
|
Dr. Venkat
Krishnamurthy, CTO Checkpoint Systems, formerly CTO Oat Systems |
|
11/11/2009 |
|
Part I: Internet and
Finance: The Google effect ·
Internet
technology: Enabling the individual – Etrade, Ebay
etc. ·
The network effect: Google changes valuation ·
Social
networking: Future models ·
Consumer
tools: Bloomberg, VentureXpert,
Aarm · Part II: Case Discussion |
Paypal |
|
Prof. Brian Subirana, IESE,
Barcelona |
|
11/18/2009 |
|
Part I :
Insurance ·
Pooling
of risk ·
Calculating
fair pricing ·
Insurance
and options ·
Technology
in Insurance Part II: Case
discussion |
Innovation at
Progressive(A) |
|
TBD |
|
12/02/2009 |
|
Part I: Risk Management ·
Portfolios ·
Risk
Management ·
Markowitz
Model ·
VAR
Models ·
Enterprise
Risk Management Part II: Case discussion |
Harvard Management Company |
|
TBD |
|
12/09/2009 |
|
Part I: Architecture of Financial Systems ·
Components ·
Databases ·
UI ·
Engines ·
Computational Complexity Part II: Case Discussion |
Linux |
|
Prof. Stephen Edwards, Columbia University |
|
Final Day |
|
Paper Reports and Project Demos Due |
|
|
|
Project
Required
Text
This
course has no single text. The course material consists of cases available from
Harvard Business Publishing that will be used for the class case discussion,
notes provided by the instructor, class presentation handouts and sections from
different course references.
A
list of class references are provided below
References
The
course will not have a text book. The reading and case study material links
will be provided the week before. Typically the relevant documents can be
bought and downloaded from Harvard Business Publishing at www.hbsp.com.
Additional references include
1. Z. Brodie,
R. Merton, The Design of Financial Systems:
Towards a Synthesis of Function and Structure, Harvard Business School
2.
Robert C. Merton and Zvi
Bodie,
“Design of financial systems: towards a synthesis of function and structure”
3.
Charles
Mackay (Author), Andrew
Tobias (foreword), “Extraordinary
Popular Delusions & the Madness of Crowds”
4.
Nassim
Nicholas Taleb,
“The Black Swan: The Impact of the Highly Improbable”
5.
Robert
C. Merton, “Continuous-Time Finance”
6.
John Cochrane, The Risk and Return of Venture Capital, University of Chicago
7.
David
F. Swensen,
“Pioneering Portfolio Management: An Unconventional Approach to Institutional
Investment”
8.
Thomas
Meyer, Pierre-Yves
Mathonet,
Beyond the J Curve: Managing a Portfolio of Venture Capital and Private Equity
Funds
9.
Richard Brealey,
Stewart Myers, and Franklin Allen,
“Principals of Corporate Finance”
10. Thomas
Cormen,
Charles
Leiserson,
Ronald
Rivest,
Clifford
Stein, “Introduction to Algorithms”
11. N.
Gregory Mankiw,
Macroeconomics
12. George
Tillmann,
“The Business-Oriented CIO: A Guide to Market-Driven Management”
13. Mark
L Berenson, David
M. Levine, Timothy
C. Krehbiel,
“Basic Business Statistics”
14. Steve
Maguire, Writing Solid Code: Microsoft's
Techniques for Developing Bug-Free C Programs (Microsoft Programming Series)
15. California Pension
Fund Alternative Investment Report, Strategic Program Review.
16. Moody’s Investors
Service, “Rating Methodology”
17. National Venture
Capital Association Handbook, 2007
Documents
You'll
perform a design-it-yourself project in the second half of the class. There are
five deliverables for the project:
Project groups should be three students or more.
Project
Report
This
is a critical part of the project and will be a substantial fraction of the
grade. Include the following sections:
Include all of this in a single .pdf file (don't print it out) and email
it to me on the due date. Also create a Zip file and upload to the class
archive.
Projects
Grading
30 % Class participation and summaries
40 % Project
30 % Quizzes
NO EXAMS
Late Policy Zero 25% for anything handed in
after it is due without explicit approval of the instructor.