LT2 Orders in Illiquid Markets

Two thinly traded stocks. One trader works a sale and the other a purchase, each judged on execution.

Objective

Finish the order in two periods, staying inside a corridor of 4,000 shares around the path to the target. Shares left unfilled are penalised at 5%.

What it shows

• Execution in a thin market, where an order is large against the book.
• Two benchmarks for two orders: VWAP and arrival price.
• A corridor that penalises both falling behind and rushing ahead.

Watch out for

• Selling the first half quickly and leaving the rest to a book that has emptied.
• The buyer and the seller trading different stocks, so neither helps the other.
• A benchmark the student's own orders help set.

Who takes part

• Seller — half the class. Holds 20,000 THIN and sells it. Judged on execution against the session VWAP.
• Buyer — the other half. Is short 20,000 THINB and buys it back. Judged on execution against the arrival price.

Class size

Twelve to forty students, split evenly between the two roles. A thin book is what the case is about, so a larger class does not make it easier.