There is an apocryphal story told in certain chess circles about a teenage boy that simultaneously challenged the great Russian chess champion Alexander Alekhine and the Russo-German Grandmaster Efim Bogoljubov. The boy had separately approached each of the two grandmasters to play games of correspondence chess. The two champions, without knowledge of the other’s participation, accepted the boy’s offers to play for money, with odds favorable to the boy. The chess greats, who happened to be friends, discovered the scheme in a much later conversation, and realized that the boy was merely acting as an intermediary between them, relaying moves between the two grandmasters. The boy, because of his favorable odds, was assured of netting a profit on the intermediation regardless of who won the match.

Intermediation is the keystone of the world financial system. While much essential financial decision-making focuses on the time and risk dimensions of investing, intermediation is the process that actually moves capital from businesses, institutions, and individuals with surplus funds to those that need them. Trading is central to this intermediation. Some traders have great expertise in valuation, quantitative analysis, or other investments tools, and serve important roles in this intermediation process. Other traders merely serve as intermediaries, quoting their prices based on the trading moves played by the experts. Their roles and opportunities are considerable as well. Regardless, all traders need to understand their markets and manage their risks.

Trading of financial instruments and securities continues to be a driving force in the U.S. economy.  It is a growing source of controversy in the media and an area of intense professional interest among students and professors. Business schools are more aware than ever of the relevance of trading and continue to develop specialized masters and undergraduate programs in finance, financial engineering, quantitative finance and risk management to deal with trading-related issues. Increasing numbers of university business schools offer at least one course on securities trading, supplemented by a variety of supporting courses in investments, derivatives, fixed income, market microstructure, risk management, portfolio management, etc. In addition, many universities and colleges have built or are building designated trading rooms, have acquired and are seeking to acquire the latest trading technologies, and are using these rooms and technologies to highlight and tout program advancements. Some institutions are integrating use of these rooms into their current curriculums and others are designing new curriculums centered around these facilities. Increasing numbers of students are interested in pursuing trading as a career and even more are interested in trading as personal pursuits.

Securities trading is a very broad topic, and merits considerable discussion. There are thousands of books on trading, all-too-many of which present their authors’ opinions on “how to trade your way to riches.” There are quite a few outstanding books that focus on fairly narrow aspects of trading, such as market microstructure, algorithmic trading, risk management, and day-trading, for example.

Financial Trading and Investing, Second Edition seeks to provide a broad overview to trading and investing, much as any standard investments text. However, the focus of this text is on trading, trading institutions, markets, and the institutions that participate in, facilitate, and regulate trading activities. Without demanding a background in econometrics, it explores alternative markets and highlights recent regulatory developments, implementations, institutions and debates. New explanations of controversial trading tactics (and blunders), such as high-frequency trading, dark liquidity pools, fat fingers, insider trading, and flash orders emphasize links between the history of financial regulation and events in financial markets. New sections on valuation and hedging techniques, particularly with respect to fixed income and derivatives markets, accompany updated regulatory information.

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