Price Discovery, step 1 of 5
PD0 Price Discovery
Session timeline
Briefing
Trading40 min
Debrief
The case
A takeover target trades between two traders. Each receives a private estimate that is updated over the session.
Objective
Trade TGT toward its final value. Assessed on profit and loss, with closing positions valued at the final value.
What it shows
- Price discovery: each trader holds part of the information.
- The final value is fixed, at the offer price; the two estimates move toward it from opposite sides.
- A price that should land between the two estimates, then follow them together.
Watch out for
- Trading on the estimate alone when the price has already moved toward the other.
- Believing the estimate more than the price.
- An estimate that is updated while an old order still stands.
Who takes part
- Trader A — half the class. Receives a private estimate of TGT's value, updated over the session.
- Trader B — the other half. Receives a different private estimate, also updated.
Class size
Twelve to forty students, split evenly between A and B. The two sides need each other.
Concepts
- Price discovery
- Market efficiency
Roles
Trader A
You are trader A. You trade TGT, a takeover target.
- You receive a private estimate of its final value, updated over the session.
- Trader B's estimate differs from yours.
- Assessed on profit and loss, with closing positions valued at the final value.
Trader B
You are trader B. You trade TGT, a takeover target.
- You receive a private estimate of its final value, updated over the session.
- Trader A's estimate differs from yours.
- Assessed on profit and loss, with closing positions valued at the final value.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| TGT | Takeover Target | Continuous trading | Trade it |
In the tracks
- Step 1 of 5 in Price DiscoveryThe final value is fixed; each desk holds part of it.