Finance Team Earns Solid Returns in Trading Contest
Students Make More Than 12.6% in Paper Profits in National Competition
Dec. 9, 2009
A School of Management student team quickly learned the serious side of stock trading in a recent national competition in which the group’s account value plummeted precipitously before members made a comeback to net a 12.6 percent profit and capture second place.
Five members of the School of Management-based Financial Leadership Association made up the UT Dallas squad that took the No. 2 spot and $750 prize money in the thinkorswim Collegiate Trading Competition.
Sponsored by the University of Houston Finance Association, the invitational market simulation drew 26 student teams. The online contest permitted entrants to compete from their home schools, but rules forbade them from seeking help from professors or professionals.
Before defeating all but one UH team, the UT Dallas players had to overcome their own shortcomings in the five-week challenge, which ran from Oct. 1 to Nov. 6 and allowed trading in stocks, stock options, exchange-traded funds and indexes.
Trading on a real-time platform run by online broker service thinkorswim, the FLA competitors got off to a conservative start and initially took gains regularly. But finding themselves in eighth place after two weeks, the team “took some big risks and lost a lot of money,” member Adib Motiwala, an MBA student, wrote in a recap of the challenge.
Down to about $60,000 from the opening balance of $100,000 and 50 percent margin given each team at the competition’s start, the FLA five took a couple of days to regroup. Then, Motiwala recalled, he “booked some losses to free up some equity and made two trades that would take the account back to $105,000.”
The team’s early roller-coaster plunge belied a disciplined approach, according to FLA adviser and School of Management finance faculty member Frank W. Anderson. “It wasn’t like they were just slinging stocks,” Anderson said. “They did use financial analysis” and carefully evaluated their choices.
Because the competition coincided with earnings reporting season for most companies listed on U.S. stock exchanges, Motiwala had a specific strategy of buying call options on stocks whose reports were coming due within a few days. “The idea,” he said, “was to buy options on big-name companies and companies that were expected to report good numbers and beat analyst expectations, even if the numbers were lower compared to the previous year.”
Late at night, fellow team member Charles Luongo, a senior finance major, caught up on news of leveraged energy sector and emerging exchange-traded funds to make his competition decisions for the following day. He made gains trading in options in those sectors.
Meanwhile to safeguard their recovery, “we had rules to manage our risk,” FLA vice president, team member and finance and economics junior Danh Nguyen said.
“I think having a defined strategy while managing risk contributed to the win,” Anderson said.
Despite the team’s stellar comeback, one University of Houston team fared better, taking first place and $1,000 with a closing account balance of $141,213. Luongo, Motiwala, Nguyen and fellow team members Elena Swindull, a graduate finance student, and Yu Zhang, a junior in finance, finished with $112,575 in their account. Their 12.6 percent return compared with a 3.6 percent return on the Standard & Poor’s 500 in the same period.
Although scheduling conflicts kept him from joining the team, FLA President Jeff Harrington, an MBA student, kept a keen eye on the competition. He observed that only five of the 26 teams taking part in the thinkorswim contest made money. He attributed the shortfalls to “lack of skill” and “not making good picks.”
But Anderson said, “I think it’s also an indication of how hard it is to make money trading.”
And that point proved useful, Harrington said, because the FLA “used the competition as a teaching platform” for all 130 of its student members, almost all of whom are enrolled in the School of Management.
The second-place UT Dallas team included (from left) Adib Motiwala, Danh Nguyen, Yu Zhang and Charles Luongo. Team member Elena Swindull is not pictured.
|“I think having a defined strategy while managing risk contributed to the win,” said Financial Leadership Association adviser and finance faculty member Frank W. Anderson.|