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General Course Information:
COMS W4995.003 FINANCIAL TECHNOLOGY
M     06:10P-08:25P
FAYERWEATHER 313

Instructor Information

Dr. Gitanjali Swamy
 Adjunct Faculty
 Office Address: 464 Mudd Hall, Columbia University
 Telephone Number: +1 617 407 5667
 E-mail: gms2155@columbia.edu

TA Information:

Monal Sanghvi
Office Hours: Tue-Thur 11 AM - 1PM
TA Room 122 Mudd
 E-mail: mts2143@columbia.edu

 Amandeep Singh
Email: as3716@columbia.edu
Office Hours: Wed 6PM - 8PM
TA Room 122 Mudd
Prerequisites
Alternate email: gmswamy@cal.berkley.edu
Course Objectives
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 Projects

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.
Method of Instruction
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.
Teaching Plan

The following describes the teaching plan for Financial technology:

Date

Lecture

09/09/2010  

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

  • Basic Math
  • Algorithms
  • Statistics
  • Game Theory
  • Systems
  • Basic Financial terminology

 

09/20/2010  

Part I: World of Financial Systems

·           Origins

·           Transactions

·           Financial Product Definitions

·           Systems

·           Size and Shape of Space

·           Examples

 

Part II: The Public Good Game

09/27/2010

Part I: Retail Financial Products

·         ATM, Checks and Banking Systems

·         Payment systems – Checkpoint, Verisign

·         RFID, Mobile and the future of financial payments

·         The Future of retail and banking

Part II: Case discussion:

10/04/2010

 Part I: Portfolios of Financial Assets

·         Risk Management

·         Markowitz Model

·         VAR Models

 

Part II: Case discussion

 

10/11/2010

 Part I: Private Markets and Rating Systems: Technology for Illiquid assets

·         Fund Structures

·         Art & Tulips: Valuation of Illiquid Assets

·         Rating Systems and ANN’s

·         Structured Products

·         The evolution of private market valuation with technology

 

Part II: Case Discussion

10/18/2010

Part I:    Public Market Systems: NYSE, Nasdaq etc

·         Stock Market Participation and the Internet: Etrade

·         Markets and technology/financial Risk

·         Data modeling and mining

 

Part II: Case

10/25/2010

Part I: Valuation and Trading Systems for New Products

·         Delusions and the  madness of crowds: Tulips, Alchemists and the South sea bubble

·         Heat Flow Equation and Option Pricing

·         Valuation and Trading Systems for new products: Long term capital

 

Part II: Case Discussion

 

11/01/2010

Midterm Project Presentations

10 Mins for each team

11/08/2010 

Part I: Credit Markest

·         Overview: Credit Markets

·         Valuing Credit

·         The Black Swan

·         Risk Management

·         IT issues for complex markets and situations

 

Part II: Case discussion

11/15/2010

Part I :    Insurance

·         Pooling of risk

·         Calculating fair pricing

·         Insurance and options

 

Part II: Case discussion

11/22/2010 

 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

 

11/29/2010 

 Part I: Architecture of  Financial Systems

·         Components

·         Databases

·         UI

·         Engines

·         Computational Complexity

 

Part II: Case Discussion

12/06/2010

 Part I: Conclusions, lesson learned and the future

Part II: Paper discussion

12/13/2010

Class Project Presentations and Demos

Project report + code submission by 5pm
Method of Evaluation
Grading

40 % Class participation and summaries
40 % Project 
20 % Quizzes 
NO EXAMS
Late Policy, On time no reduction, 1 week 25%, 2 weeks 50%, after 2 weeks and before final 75% reduction.

Documents

You'll perform a design-it-yourself project in the second half of the class. There are five deliverables for the project: 
1.A short project proposal describing in broad terms  the arena you want to build a financial system for, the thesis or hypothesis,  what you plan to research, what you plan to build/demo
2.A detailed project design describing in detail the functional specification, architecture of your project, functional. This should include block diagrams, algorithmic modules: everything someone else would need to understand your design. You should have done some preliminary implementation work by this point to validate your design. 
3.An early demo of your project and progress. It should include the theoretical discussion and be roughly 75% working and be showing signs of life. This is to make sure you are making reasonable forward progress. 
4.A presentation on your project to the class 
5.A final project report 
  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: 
1. An overview of your project: a revised version of your project proposal. 
2. The theoretical hypothesis or thesis that you are addressing
3. The detailed project design documents: a revised version of the project design. 
4.A section listing who did what and what lessons you learned and advice for future projects 
5. Complete listings of every file you wrote for the project. Include C source, Java, Stata, SPSS code. 

Include all of this in a single .pdf file (don't print it out) and upload to the class archive.
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.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
 
A list of class references are provided below: 

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, 20
18. Risk Management for Fixed Income, Mcgraw Hill