Trading simulation 4 (Session 14)

Transcription

1 Quote-driven Markets

2 This time it counts Your second 2.5-3K word essay will be about this simulation! (Trading performance does not impact your mark) Take notes during the trading session FTS has Excel link! Data and some evaluations will be made available asap

3 Aim Understand and experience a pure quote-driven dealer market In quote-driven markets Dealers offer liquidity Other traders take this liquidity

4 Detailed task: Dealers Dealers provide liquidity start day with position 0 in stocks end day within certain bounds (either ±0 or ±2, 500 NEW!) can use limit (quotes) and market! orders How to make money "earn the spread" lose to informed traders gain from uninformed traders

5 Detailed task: Informed traders Informed traders take liquidity (can only use market orders) receive (noisy) information on stock payoff/value at random times start day with position 0 in stocks risk bounds during day = initial position ± 10,000 stocks EoD position within the bounds, marked to fundamental value! How to make money trade on information double reward: fund gain PLUS buy low / sell high (or sell high / buy low) gain

6 Detailed task: Brokers Brokers take liquidity (can only use market orders) will see a (big) positive or negative number as stock inventory have to end the day with position 0 risk bounds = straight line initial to final pos. ± 2,000 stocks How to make money by serving your customers well (VWAP) have to read the market

7 Exogenous role Uninformed trader random, uniformed order flow larger if spread smaller huge spread, no flow!

8 Each team competes with others having exactly the same task

9 Example Information "Estimated payoff = 1.2" = your analysts says "the stock will pay dividend of 1.2 at EoD" Interest rate is 10%. Fundamental value = 1.2/10% = 12 (no risk premium) BUT this is an estimate and changes! At EoD payments settled stock position valued at fundamental value P&L calculated Buy undervalued, sell overvalued!

10 Noisy estimate of stock EoD dividend

11 Noisy estimate of stock EoD dividend Our simulation Estimate follows Brownian motion E T = E t [1 + N (0, σ 2 (T t))] + noise with σ = 20% and payoff at time 1 (start at time 0) NEW very rarely (once a day or never) a larger jump can occur size in U([ 10%, +10%] Noise to observation is uniform and equals E T U([ 4%, +4%])

12 Trader screen

13 Performance analysis Dealers P&L = profit / loss from trading Risk limits = bounds not to be violated (±10, 000) Target = final position met 0 or ±2, 500 (see scrip) unrealized P&L for those shares outside bounds, marked to market

14 Performance analysis Informed traders P&L = profit / loss from trading unrealized P&L = value of position at close (marked to fund. value) Risk limits = bounds not to be violated (initial position ±10, 000) Target = final position inside risk bounds

15 Performance analysis Brokers VWAP Risk limits = bounds not to be violated (initial to 0 at EOD position line ±2, 000) Target = final position equals 0

16 Computing scores Scores are computed separately for each trading role Consider all traders of a type in the experiment wk : Weight on performance measure k. k = 1,.., N x i k : Trader i s raw score on performance measure k Normalize the raw scores: y i k = xi k µ k σ k Total score for trader i: k w kyk i Weights: all equal!

17 Let the competition start Tick size = If not shown correctly: true price = cut off other digits E.g., = 9.12 Time = 60 minutes (real time) Ranking by overall score (weighted sum of scores) for same types

18 Instructions Start NHH virtual desktop "FIN11" Control Panel Language and Region Set Number format to English (United States) REMEMBER: Decimal numbers are 1.2 NOT 1,2 (= 12) 1. Lecturer starts FTS simulation 2. Lecturer announces Market IP Address 3. You start FTS software 4. Select FTS Interactive Markets -FTS Trader Version Insert correct Market IP Address 6. Insert Trading Name and Password from sheet provided 7. Enter your names in Your Name only) If things go wrong, simply restart FTS and log on again

19 Final word Good luck!