Faculty Advisor

Abstract:  Billions of dollars change hands throughout the course of every business day on Wall Street. At the basic foundation of this elaborate system of financial institutions are traders, whose strategies can determine the profitability of their respective firms. Prior to implementation, these strategies must be tested on simulated exchanges in order to evaluate potential success for obvious reasons of capital and risk exposure that would be necessary to conduct such experiments on actual exchanges. The Penn-Lehman Automated Trading (?PLAT?) Project provides a framework called the Penn Exchange Simulator (?PXS?) that realistically simulates an exchange by combining real-time market data with automated client orders. All major Wall Street broker-dealers currently maintain backtesting environments in which trading strategies can be tested based primarily on price information. The uniqueness of PXS stems from the fact that it is based primarily on order books, which keep track of current limit order data. This adds a new level of realism to the automated trading platform and increases the accuracy of the associated algorithms and strategies.