December 09, 2011

Games used to be a standard rite of passage of the junior trader's upbringing. And it is surprising on closer examination how much of financial market activity can be captured by relatively simple games. Ideas around bidding and offering, position management, inventory and liquidity are embedded in the framework of card and dice games. Beyond these structural elements, can be found the less tangible psychological factors: the fear of loss, the value and dangers of decision-making under the influence of adrenalin and the need to discern truth from misrepresentation.

And of course there is theory: statistics after all was developed at the outset for the formal analysis of gambling.

Generations of traders have been raised on versions of Liar's Poker and on paper trading an arbitrary number such as the average age of people in the room. Whether managers used the label or not, such training is a direct manifestation of an approach known as gamification. In other words, relying on the strong parallels between a game and an actual business function to be able to use the game as a highly effective teaching tool. Note that this goes beyond mere offline replication of the business function. Gamification of a task aims to power-up training to be more effective than mere simulation. And when executed properly, it does just that.

So how does gamification in technology work? Most importantly, by making a simulation hugely enjoyable. A game that is enjoyable immerses the player in the moment and in the activity. By centralizing the players themselves within the action, learning comes almost effortlessly and certainly instinctively. Contrast this with say attempting to learn a practical task by reading about it or by attending a lecture. For practical tasks, learning is best achieved not by being one-step removed from the action, but by being part of the action and, what's more, enjoying the feeling.

The benefits of simulation to trainee traders in the financial markets have long been known. Most obviously, 'mock' trading is risk-free, in contrast to setting a junior loose in the market to learn from his or her costly mistakes. But there are other benefits: different games can be used to replicate different aspects of the trading environment. From games of pure chance to those of pure strategy such as chess, trading firms have long recognized their applicability in training aspiring traders. Yet, such games or simulations have distinct limitations: clearly a simple card game cannot hope to replicate the complexity of a typical derivatives market; in particular it is the exponential, non-linearity that tends to be omitted. While a dice game might teach basic decision-making under known probability distributions, these lessons can only be taken so far due to the context of that game. There are further difficulties, not least the necessary presence of senior traders in order to host the games. Labor intensive activity is clearly undesirable when those 'laborers' are traders perhaps earning hundreds of thousands of dollars per annum!

The solution has come from innovative new technology that marries the benefits of gamification and simulation but without the unwelcome third wheel of labor intensity. The technology allows for even complex derivative markets to be modeled in a simulation that is driven by artificial intelligence, in a framework that borrows heavily from gaming. The results can be astonishing with training times typically halved and strong or weak performers singled out far earlier in the assessment cycle. To see how this works, it is only necessary to consider the contrast between the pre-digital, offline mock trading with its modern counterpart. Instead of derivatives trainees sitting around once a week after the markets close and playing a cash-market inspired trading game with a handful of willing senior traders, now they can train at will autonomously or in self-organized groups. The sheer amount of mock trading that can be put through a modern derivatives simulator dwarfs what could realistically be achieved using traditional methods. And again, it is the gamification ideas embedded in the technology that ensures trainees want to play and learn while they do so.

A further reason for the dramatic improvement in training outcomes is the addition of artificial intelligence, itself something of a gamification notion. At first, simulators simply replicated the offline experience in an online environment. But it was with the elimination of the need for senior traders to be on hand that the gamification could take full effect. Junior traders want to learn whenever they possibly can rather than whenever their boss has five minutes to spare. No video game is dependent on the presence of another person to host and direct the game; nor should a derivatives market simulator be any different.

All great new technology becomes a source of innovation in itself. Connecting a derivatives market simulator to a cutting edge AI back-end and applying gamification concepts has resulted in technology that has shifted the training paradigm in the derivatives markets. Trainee traders are now presented with unparalleled opportunities to self-train or learn collectively using AI-backed simulators that their predecessors could only have dreamed of. Gamification is a crucial element alongside realism and feature-richness. This can be surprising, but it seems that the most comprehensive and life-like simulator imaginable is worth very little without playability when it comes to training people. Volcube, an options and volatility market simulator, uses trader league tables to boost competitiveness within firms amongst trainees. Other gamification concepts Volcube employ include online trading and 24/7 accessibility. Grading and points scoring for trading performance also contribute to a sense of direction, progress and the narrative. This is a typical gamification technique involving rewards or badges that affirm a player's progress.

Where next then for training technology in the derivatives markets following this change? The opportunity to increase participation is the obvious next step. In the past, mock trading with or without a simulator was the preserve of trainees destined to trade. Now in contrast the opportunity to gain first hand experience of a realistic derivatives market in an unintimidating and risk-free environment is available to any market-facing professional. Risk managers, trading software developers, even operations and settlements staff are realizing that the barriers to entry for knowledge-seekers have fallen. This is an exciting time for training in the derivatives sector. At a time when the risks associated with derivative instruments have never been greater, the new simulation technology updates training methods to match developments in the markets themselves. Now a comprehensive understanding of derivatives markets can be passed on to new participants and peripheral staff in a fraction of the time and cost previously required. And, pleasingly, the chief driver behind this technology's efficiency, is the rather fun ideas around gamification.

Simon Gleadall is the CEO of Volcube, the global derivatives simulation training technology provider. He has traded derivatives for over a decade and is also the author of The Metaphysics of Markets.