Running head: PRE-REPORT OF TRADING GAME 1

Pre-Report of Trading Game

Name

Institution
PRE-REPORT OF TRADING GAME 2

Pre-Report of Trading Game

Part I
As per the information asymmetry, the traders in this market were categorized
into two groups; liquidity and informed. The liquidity traders had no access to achieve
information. The key reason or goal behind this was to reduce the transaction cost by
getting rid of the liquidity constraints. If not, the liquidity traders would experience
penalties. The informed traders had access to private information before the start of
the trade. The main objective of this was the utilization of the information with the
attempt of maximizing profits. Informed traders are profit-motivated and thus they
could only purchase for the shares when their values go down and in turn sell them
when overvalued. Further, in the absence of liquidity requirements, informed traders
can trade slighter to minimize transaction impacts. This is in consideration that
informed traders do not have a desire to make prices more informative. The essence
of this report is an analysis of various behaviors of both liquidity and informed
traders, and also the impact they have on the prices of shares.
Liquidity Trader
In the case of liquidity traders, shortfall penalty, as well as trading cost, was
used to compute for the total cost. Referring to line chart labeled graph 1, it shows a
smooth falling trading prices trend from 22.5 to 15.8. Even though, the tendency of
the volume indicated on graph 2 revealed a fluctuation since there was steep shoot to
3000 at time 10:00:02 which then fell sharply and drastically to 300 at time 10:00:17.
During this time the price steadied at 22.5. The impact was a negative relative
association amid the prices and the trading volumes. Then, the time between
10:00:26 to 10:00:42, prices rose 24 from 22.5 while the volume fell from 700 to 500.
The prices declined to 18 from 19.5, when the volume of trade rose to 1600 from 100.
Graph 1
PRE-REPORT OF TRADING GAME 3

Last
30
25
20
15
10
5
0
10:00:02 10:02:17 10:05:31 10:08:58

Graph 2

Volume
3500
3000
2500
2000
1500
1000
500
0
10:00:02 10:02:03 10:05:18 10:08:21

The traders’ behaviors, for instance, Zixinliu, Tianshilia and ZiyangTan they
bought share aggressively in the first 1.5 minutes; the probable reason is that could
have an idea that the price was going to rise hence perform vigorously prior notice by
the public. Furthermore, the large trade volume by the three traders revealed that the
liquidity traders like NathanSpa and QuiruiHua followed the informed traders'
transaction path. The resultant was increased price for the first 2 minutes. Referring to
the final true value it was revealed that the pricing stock was overvalued at the time.
The informed traders like Zixinliu sold their stocked shares when the price shoot
above 18 and purchased back the share when the price went below 18. Something to
consider from these traders, informed, is that they traded slightly and then hidden
their purpose in a more appropriately because of the hidden broker id rule. Due to
this, the previous price was at 15.8 which a bit below the true value of 17.6. This
could be due to an attempt of an individual trying to utilize hidden id to disturb the
market.
The quality of the market can be measured through effective spread that was
PRE-REPORT OF TRADING GAME 4

disintegrated into adverse selection, order persistence and the processing cost of an
order. The market liquidity is believed to worsen whenever the effective spread value
becomes large. In our case of this market, the share weighted average effective
spread was 0.0081, indicating that the market was liquid. Concisely, the 10 seconds
real spread and 10 seconds price impact is seen to decline in a complete tendency.
Further, the effective spread decrease is caused by a decline in price impact, a
phenomenon noticeable in the first 2 minutes. For the price efficiency, trading price
on this session was not efficiency. Because the true value of the per share is 17.6 and
VWAP is 21, and with the gap of 3.4, the true value was far away from VWAP.
Informed Trader
As illustrated in graph 3, the whole tendency price dramatically changed. The
price fluctuated from 23 to 24 prior the time at 10:01:25. It then fell intensely to 22
after the time at 10: 01:40. After that, it attained a relatively stable trend. For the
trading price-volume relationship, the behavior was that when the price is up the
volume was down and vice versa. For instance, the price went down from 23.7 to 23
in the time between 10:00:14 to 10:00:17, where trading rose from 300 up to
1000.
Graph 3

Last
24.5
24
23.5
23
22.5
22
21.5
21
9:59:56 10:01:0910:05:3110:07:42

Graph 4
Graph 4
PRE-REPORT OF TRADING GAME 5

Volume
2500

2000

1500

1000

500

0
9:59:56 10:01:09 10:05:31 10:07:42

As for informed traders’ behavior, for instance, Zixinliu and Tianshilia could
have achieved or accessed private information about the rise of the stock price in the
future. For that reason, they ended up purchasing highly on a large scale. The
resultant of this would result in an increased price, but that was not the case. Because
of some other trade like NathanSpa, and QuiruiHua who sold a large number of their
stock shares at once, the price balance was maintained. This could be a reason for the
fluctuation that occurred between 23 and 24 prior time at 10:01:25. More noticeable,
traders like Zixinliu could have been the informed trader who accessed the
information that the share value was below 23. For that reason, the time between
10:00:40 to time at 10:00:55, there were all seller-initiated trade and traders sold their
shares which dropped the price steeply at this time. Finally, when the news that “the
forward PE has been revised from 8.8 to 9.4” was made public, it gave liquidity
traders like NathanSpa confidence to purchase shares. This made the price had an
overall ascending tendency after 10:01:55.
The market quality had an average effective spread of 0.05289 implying that
the market was more liquid. Graph 6 shows share weighted average real spread and
price impact volatility changed. Real spread had a high influence on effective spread
than adverse selection in the full trading period. For price efficiency, the difference
between true value (22.47) and VWAP (22.84) was 0.37. It reflected that the trading
price was more effective than that on session 2 because of the closer relationship
between true price and VWAP.
Part II
Liquidity Trader
The key goals of a liquidity trader are obtaining optimal profit and invest the
least with no additional information, and at the same time meet the requirements of
PRE-REPORT OF TRADING GAME 6

liquidity. A liquidity trader should, therefore, sell the stock at a high price but buy it
at a low price. They should thus compare the best bid with ask price, considering the
previous day prices, to draw a concise conclusion of price variation. Due to
uncertainty of price prediction, liquidity trader should adopt the strategy that: slightly
sell shares at varying prices to reduce the cost of analysis error. The other strategy a
liquidity trader should employ is increasing the transaction frequency and reducing
the tick size to minimize the trading cost.
Informed Trader
Since informed trader has access to private information, it is easy for them to
know if the price will shoot in the future. Based on the obtained information, they
entirely buy their stock during the majority trading process and sell only a few at low
prices at the end of the trade. The strategy behind the success of informed traders is
aggressive transaction and at the same time conceals their information and purpose.
The other strategy to the fulfillment of their trade is focused on ascent tendency
without ignoring the true value of BHP and pay attention to the news obtained and at
the same time applying flexible methods. The other strategy by the informed traders
is to take their time to calculate the true value to determine if the accessed information
is valid or not. Being sure about the reliability of the obtained private information is
crucial as these traders than just need to trade slightly prior exposure of the
information to the public.
Conclusion
The goal of this trading game is to establish an impression of trading
marketing examining the impact information on share prices. To be specific, various
type of traders can understand what strategies should be adopted to deal with changes
in stock prices and information. At the same time, it helps us to learn to assess the
price efficiency and market quality. Besides, with the different goal of different types
of trader, this trading game also helps us to have a deeper understanding of gathering
information, determining the accuracy of private information, and analyzing the true
value of the stock.
PRE-REPORT OF TRADING GAME 7

Appendices

Graph

market liquidity

100

0
10:00:02 10:00:55 10:02:36 10:04:44 10:06:01 10:07:30 10:09:41
-100

espread respread
adverse_selection

Table 1

Table 2

Table 3
PRE-REPORT OF TRADING GAME 8

Graph 6

market liquidity
60

30

0
9:59:56 10:00:20 10:01:09 10:02:06 10:05:31 10:06:34 10:07:37 10:08:38
-30

espread respread adverse_selection

Table 4

Table 5

Table 6
PRE-REPORT OF TRADING GAME 9

Table 7

Table 8