A strategy for stock trading based on multiple models and trading rules CS 395T Project Report

The structure of the game is essentially as follows. The PXS (Penn Exchange Simulator) server provides an electronic exchange for Microsoft shares, ticker symbol MSFT. This electronic exchange is a hybrid of a real world electronic crossing network (ECN) within NASDAQ and an internal market of agents such as mine. The agents are software programs written to communicate in a client-server protocol with the PXS server. Each agent has the option of invoking various actions such as “Buy” and “Sell”, has control over price and volume of trades and has access to various indicators of both the internal (simulator) and the external (Island ECN) markets. The objective of the agent design is to design an automated strategy that can satisfy the following key requirements: 1. Maximize profits. Specifically, maximize expected return in a strict statistical sense, measured by the Sharpe ratio, to be defined below 2. Unwind (i.e., bring to zero) the entire share position at the end of the trading day. Failure to do so results in a penalty. Any excess shares held at the end of the trading day are valued at zero. Shares that are ‘short’, i.e., a negative holding, needs to be bought back by the agent at twice the closing price. 3. Take into account transaction costs, i.e., a fee on every share traded.