The Future of Futures May Be Decided Here

MIT's state-of-the-art 'stock exchange' promotes learning in risk-free arena

'Last night I took a long position on 5,000 shares of IBM,'' says David Raboy, sitting before a computer work station as an electronic ticker-tape flashes across the wall behind him.

''I started off with a million dollars, and this value up here'' - he points to a number on the computer screen - ''is actually my market value. Right now my portfolio is worth $992,000, so I've lost about $8,000.''

A sizable loss, but Mr. Raboy doesn't seem to mind. The reason: No money was actually invested. Raboy is not a money manager but a student, and this is happening not at a large brokerage firm in one of world's financial capitals, but in the recently unveiled trading room at the Massachusetts Institute of Technology here.

The state-of-the-art training and research center is the closest thing yet devised to an actual trading room - a place where stocks, bonds, and other issues are bought and sold. MIT's Sloan School of Management - which together with MIT has been feeding Wall Street firms the way they once fed Silicon Valley - hope to raise the education of future brokers, investment bankers, and money managers to a new level of real-world skill and insight.

The idea behind the trading room, says Paul Asquith, professor of finance and senior associate dean of the Sloan School, ''was to blend theory and practice. We decided to do not just a trading room - there are a number of those starting to pop up at other universities where you can do simulated trading, with three or four desks receiving data. We decided to build a room where you could walk from Wall Street down here and do a day's worth of work: all of the facilities, all of the data, all of the software, all of the power to do that.''

MIT wants the room to be not only a lab for students but also a research tool for the faculty. Financial research is a tradition at MIT, where the so-called Black-Scholes formula - a renowned method of putting an accurate price on financial options - was developed in the early 1970s.

It not only became a linchpin of the then-new field of ''financial engineering,'' but also spurred the rapid growth of today's $20-trillion options-trading business.

Now MIT hopes the trading room will help the Sloan faculty make equally important innovations in the new world of financial theory and practice. Potential areas of advanced research at this point include improved ways of analyzing risk, the effect of psychology on trading, and new ways of using computer graphics to display the performance of complex portfolios.

First of its kind

Although the department of finance at the University of Texas in Austin expects to open its own impressively equipped ''trading floor'' in a couple of months, the MIT trading room is the first fully equipped facility of its kind. Located in the basement of the Sloan School's main building, the brightly lit, 3,000-square-foot area is a humming nexus of financial data and high-tech equipment, where practice sessions in buying, selling, and strategizing seem indistinguishable from the real thing to a casual observer.

Sitting before 23 Pentium-powered PCs on handsome wooden trading desks, students deal with the same continuous flow of information as a trader uses, including price-volume information from Reuters - delayed by 15 minutes - on some 300,000 financial instruments around the world. The students speak to each other urgently on a telephone network that features phones with flashing red and blue lights - although the lines don't reach beyond the trading room. Breaking economic news from Europe flashes against the wall.

''What goes on here is extremely realistic,'' says second-year Sloan student Greg Tell, who worked in trading for Merrill Lynch last summer and is slated to join the firm after graduation. ''As far you're concerned, the world you're in seems real, even though the data feed is delayed 15 minutes.''

The electronic ''ticker-tape'' that cuts a swath across the wall in green letters is actually a combination of prices from the New York and American Stock Exchanges and NASDAQ. ''As far as I know, this is the only place where you can receive from all three exchanges at once,'' says Professor Asquith. ''We've written new codes to combine them.''

''Information technology is playing a big role across all business, but in finance it's especially important,'' says George Gau, chair of the department of finance at the University of Texas in Austin, ''so providing that information is key.''

When his university's own trading room - of which Professor Gau is director - opens in May, it will not only offer an impressive array of high-tech training facilities, but also will allow students to do the real thing: manage actual funds from a $3 million company.

MIT's Raboy doesn't like that idea. ''I think it would limit you,'' he says. ''One of the nice things about the MIT room is that it's a relatively risk-free environment in which to analyze everything and find out if you're right or wrong.''

The best teaching aide

Mr. Tell says there are two types of people who use the trading room at MIT: those who are going into capital-markets careers and those who are going into consulting or manufacturing or another industry.

For those going into the financial-markets industry, ''This room is the best teaching aide you could imagine - it gives them a glimpse of what to expect,'' he says. The others get a chance ''to see what Wall Street is all about - an experience not many will ever have in their lifetime again.''

Part of that experience is ''the game,'' as the Sloan students call it. ''You're given an initial amount of money - a million or 10 million, whatever - in stocks, bonds, or options,'' Raboy explains. ''The system pulls in the current prices from Reuters' data feed and allows you to buy and sell, based on the prices quoted in the market. You go ahead and trade as if it were the real world.''

Another game Sloan students play uses internally generated data to help them learn fancier skills like arbitrage pricing or put-call parity - the difference in pricing between options to sell and buy stocks. In that game ''You're trading against other people in the room,'' Raboy explains.

Pet theories

The room also lets students test pet theories. ''Suppose you thought that the Dow was more likely to go up than down after crossing the 45-point-down threshold, because people wanted to avoid the 'trading collars,''' Raboy says, referring to a New York Stock Exchange rule that bars automated trading of a stock when it rises or falls more than 50 points. ''You could test that notion using data in this room, and if it were a pattern, you might find a way to make money by buying a Standard & Poor's futures contract every time the Dow hit 45 points.''

With talk like that, it's no surprise that Raboy will be working in the market when he leaves Sloan. He'll join the investment bank Smith Barney in New York - where he worked last summer - as part of their associates-training program. ''I'll be in the sales and trading side,'' he says.

He should feel right at home. ''The unique thing about this room,'' Raboy says, ''is that if a trader walked in and picked up a phone, he could do his business the same as he could at his own desk, except for the time delays [in the flow of price information].

''You're surrounded with all this real-world equipment and data, so you feel comfortable. That's the edge I think I'll have. Beyond that, if I can more accurately analyze a problem because of my research training here, that only increases the edge.''