LS1 Liquidity Shock

One equity, ALGO, in three periods. A true value holds at 100.00, drops to 96.50 when a redemption notice goes to everyone thirty seconds into period two, and follows a random walk from there. Nobody sees it; informed computer traders trade toward it. Analysts receive a noisy estimate every minute.

Objective

Trade ALGO for profit. Positions are marked at the last traded price at the close, and the true value is shown afterwards.

What it shows

• A price moving hard with no news behind it, then the news that explains it.
• What a call auction does at the open, and how the book rebuilds after it.
• How much a noisy estimate is worth, and how late information reaches the price.

Watch out for

• The redemption notice reaches everyone, yet the price does not jump to 96.50; it walks there.
• An analyst estimate that is wrong by its own error, taken at face value.
• Desk A's private item: a client is selling, but only Desk A knows. Selling into the book moves the price for everyone.

Who takes part

• Desk A and Desk B — trade ALGO for profit on the desk's own account. Desk A is told, in period two, that one of its clients is selling ALGO through the desk.
• Analysts — one in five seats. They receive an estimate of ALGO's value every minute from 1:00, each with its own error.
• Computer traders — four market makers, twelve noise traders and four informed traders fill the book around the class.

Class size

Ten to forty students. The computer traders keep the book deep, so the size of the class does not thin it; with fewer than ten, the analysts are too few to compare.