TRADING GAME REPORT

Student Name: SIDDHARTH MITTAL (U7236324)

Professor: WAIMAN (RAYMOND)
Tutor: JAN DRIENKO
 TRADING GAME REPORT

Pre-game strategies employed and not employed

My strategy around changing tick size and being a liquidity trader and informed trader is based on microstructure
model and economic reasoning backed. For a large tick size (10 cent), the spread is generally broad (as observed
in line chart 1 in appendix), and traders prefer Limit order over market order, this allows them to choose their own
entry points rather than accepting the current market price. Large tick size also decreases the liquidity and quality of
the market. So, from the perspective of the Informed trader, are informed about the true value of the stock, I follow
stealth trading style by submitting small limit order to hide my identity and information of being the informed trader as
suggested by Kyle model (1985). One another strategy could be for an informed trader is to trade aggressively to
make full use of information advantage before it gets revealed among liquidity traders. However, I didn’t implement
this strategy, as it might come to notice to any of the liquidity trader and hence stopping all their trades. Also, being
two informed traders in a single game session, there might be a confusion between informed traders as well. They
might end up competing for their own profit which can pushes the stock price towards its fundamental value. This can
benefit liquidity traders, In the example, one might set the bid price lower than the current market price, but that price
is also lower than another informed trader's price. This collision and competition results in less profits for all the
informed traders. As a liquidity trader, I try to meet the required target to avoid the shortfall penalty. So, I try to trade
in start and end of the session, since the liquidity is comparatively large at the start and end of the session (Admati
and Pfleiderer,1988). Since there are not many participants unlike in a real trading market, the middle trading sessions
can be inactive, which can present the non-execution order.
During the session of small tick size (1 cent) due to narrow bid ask spread (as observed in line chart 2 in appendix)
market orders were more than the limit order. By placing market order, every trader tries to improve the price and
hence market becomes more volatile. As an informed trader, I will submit misleading limit order to hide my identity
and disguise myself as a liquidity trader and confuse all the liquidity traders. By doing so, the price of the stock will
drift further away from its intrinsic and true value. I think the winning strategy for the informed trader would be to drive
the price towards the true value at the end of the session by clearing the entire market and firmly placing the market
order around the true value. As a liquidity trader, I try to observe the trading pattern formed by different informed
traders by trading in beginning of the session and since informed traders wants to make profit for themselves, it
becomes easy to guess the true value of the stock and I personally try to guess the true value and gauge the
opportunity by placing market order to satisfy my liquidity need and achieve my trading goal to avoid penalty.
Trading game experience
In a session with small tick size (game 2), I participated in the game as a liquidity trader with a goal of achieving overall
net position of buying 80 shares which means at the end, I should be having 280 shares (200+80). However, I followed
the model taught in class (Admati & Pfleiderer, 1988) and satisfied my liquidity need and net position goal and tried
gaining more and more profit. However, at the end of the session, to achieve my goal and satisfy my liquidity
requirement, I placed market order to execute my order instantly to satisfy the requirement and avoid penalty.
However, it is recommended to place order at right time when one is participating as a liquidity trader. Somehow, I
satisfied the goal, but it was done on a very last second. Since, the game with small tick size had very less volume in
between, theory stands true that liquidity trader should trade either at the beginning of the market or the end, whenever
there is a good market volume to trade and rather not wait for the market to change as liquidity trader has very little
impact on the market. To achieve the goal, I placed market orders at quite low price to avoid penalty but at the same
time I incurred huge transaction cost of $153.96.
My experience being a liquidity trader in game 1 was convincing since I earned a profit of $100.9 by the end of the
session. By learning from my own mistakes from earlier weeks games, I figured out, when one should use limit order
and market order while trading in the market. I used limit order in the beginning of the session since the bid-ask spread
was broad and used market order when the bid ask spread was narrow and there was less volume as well.
Main issue: Although the trading game is not an exact example of actual trading environment because of the rules
which is quite acceptable since the aim of the game is to establish an impression of trading environment, examining
the impact of information, tick size etc. on share price.
 TRADING GAME REPORT

Calculation of profit/loss/trading cost

❖ Game 1- tick size (10 cent)
In game 1, I was an informed trader and true value of stock was $25.77. Informed trader total profit calculation:
Step 1: Net Cash position = Cash position at the end of the trading - Starting cash position
Step 2: Net value of shares = (No of shares at the end of the trading – No of shares at the end of the trading) * True
value
Step 3: Total profit = Net cash position – Net value of cash
Given: VWAP = 25.77
Net cash = 13966.4 – 10000 = 3966.4
Net value of shares = (50 – 200) * 25.77 = -3865.5
Total profit = 3966.4 + (-3865.5) = $100.9
❖ Game 2- tick size (1 cent)
In game 2, I was a liquidity trader and true value of stock of stock was 22.18. Liquidity trader transaction cost is
calculation:
Step 1: For each buy trade i, trading costs is Volumei  (TPi − VWAP )

Step 2: For each sell trades j, trading costs is Volumei  (VWAP − TPi )
Step 3: Total Transaction cost = Trading cost for buy trade + Trading cost for sell trade + penalty
Given: VWAP = 24.94
Buy trade, trading cost = 4.12
Sell trade, trading cost = 149.84
Total transaction cost = 4.12 + 149.84 = 153.96
Statistical tool and methodology
𝑯𝟎 : Mean of the bid-ask spread of game 1 = Mean of the bid-ask spread of game 2
𝑯𝟏 : Mean of the bid-ask spread of game 1 ≠ Mean of the bid-ask spread of game 2

t-Test: Two-Sample Assuming

Unequal Variances
Bid-ask (Big tick Bid-ask (small Tick
size) size)
Mean 0.904285714 0.55761194
Variance 0.397227743 0.196924514
Observations 70 67
Hypothesized Mean
Difference 0
df 124
t Stat 3.735272047
P(T<=t) one-tail 0.000142317
t Critical one-tail 1.65723497
P(T<=t) two-tail 0.000284633
t Critical two-tail 1.979280117

Since p value < 0.0.5. I reject the null hypothesis and concludes that different tick size has an impact on big-ask
spread.

Note: Large priced trades (outliers) have been removed from the both the game sessions because few outliers’
trades make the entire market inefficient since those prices are far away from the true value of stock and they act as
a noise in the market. Including those trades t the set of big ask spread will bring bias to the whole analysis and
hence has been removed for the purpose of fair analysis.
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Studies, 1(1), pp.3-40.

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Volume
Volume
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Game 2
Game 1

Best Bid

Best Bid
Appendix

References
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TRADING GAME REPORT

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Best Ask

Best Ask
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Kyle, A., 1985. Continuous Auctions and Insider Trading. Econometrica, 53(6), p.1315.
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Admati, A. and Pfleiderer, P., 1988. A Theory of Intraday Patterns: Volume and Price Variability. Review of Financial