Trading simulation 2 (Session 6)

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Angelica Mitchell
6 years ago
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1 Order-driven Markets with Asymmetric Information

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

3 Aim Understand and experience real markets where Traders have different goals and different information

4 Market setting Order-driven markets Limit orders Market orders (and marketable limit orders) Two types of traders: Brokers News/fundamental value traders

5 Trader types Brokers have to buy/sell a certain number of shares performance evaluated on the average price paid/received, and risk limits News/fundamental value traders have to make money performance evaluated on cash gains, risk limits, and market making

6 Trader screen

7 Detailed tasks Brokers will see a (large) positive or negative number as stock position have to end the day with position 0 in stocks compete with other brokers having exactly the same task News/fundamental value traders will see position 0 in stocks receive (noisy) information on stock at random times information = fundamental value + noise you can trade on this info to make money!

8 Noisy information Only News/fundamental value traders get this information! Keep it secrete! Example Fundamental value is 10 But a trader will receive either value 9.9, 10.0, or 10.1 Noise is random in 0.1, 0, +0.1 Average over all information sent is the fundamental value (No one knows, but the market knows!)

9 Example: Noisy information

10 Noisy information Our simulation Noise is uniform [ 4%, +4%] of fundamental value If fundamental value is 10 then (individual) information sent out is uniformly drawn from [9.6, 10.4] average over all information sent is fundamental value

11 Performance analysis Brokers VWAP = cash value of trades / stock volume transacted buyers want it low, sellers want it high Risk limits = bounds not to be violated (centre line ±2, 000) if you do, there is a penalty depending on how much and how long Target = final position of 0 achieved if not, penalty depending on how far you missed

12 Risk limits: broker Asset account for type 2 traders 6000 Asset 1 holding Time

13 Performance analysis News/fundamental value traders P&L = profit / loss from trading your cash account plus liquidation value of final position Risk limits = bounds not to be violated (centre line ±10, 000) Target = final position of 0 achieved Fundamental gains = profit (or loss) from buying below fund. value or selling above fundamental value

14 Risk limits: informed trader Asset account for type 2 traders 1000 Asset 1 holding Time

15 Possible strategy News/fundamental value traders Under-priced market: prices below fundamental value: BUY Over-priced market: prices above fundamental value: SELL All informed traders will do this (if inventory permits) Price will move, allowing you to (carefully) cash in Brokers If you see momentum, react Either buy/sell quickly to get good prices Pull limit order to avoid being picked off

16 Computing scores Scores are computed separately for each trading role (Broker buying, broker selling, and Information Traders)

17 Computing scores Scores are computed separately for each trading role (Broker buying, broker selling, and Information Traders) Consider all traders of a type in the experiment w k : Weight on performance measure k. k = 1,.., N : Trader i s raw score on performance measure k x i k Normalize the raw scores: yk i = xi k µ k σ k Total score for trader i: k w kyk i Weights: all equal!

18 Let the competition start 3 types of traders brokers buying 5,000 shares (initial pos. is -5,000) brokers selling 5,000 shares (initial pos. is 5,000) informed traders Time = 60 minutes (real time) Ranking by overall score (weighted sum of scores) for same types

19 Tick size Tick size 0.01 Prices: 0.01, 0.02, , 3.01, 3.02,... Inserting non-tick prices = penalty This avoids queue jumping (messing with time-priority)!

20 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

21 Final word Good luck!

Trading simulation 4 (Session 14)

Trading simulation 4 (Session 14) Quote-driven Markets 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