MMTraderGet started

Price Discovery, step 2 of 5

PD1 IPO Pricing

Session timeline

Briefing
Trading40 min
Debrief

The case

A new stock trades between two traders. Each receives a private estimate that is updated over the session.

Objective

Trade IPO toward its value after the offering. Assessed on profit and loss, with closing positions valued at the final value.

What it shows

  • The same question as PD0, for a stock that has never traded.
  • An offering price that may be wrong, and a market that finds out.
  • Two estimates on opposite sides of the offering price, converging.

Watch out for

  • Anchoring to the offering price, 15.00, when the estimates point elsewhere.
  • Waiting for the first trades to set a price, and so setting it too low.
  • Estimates that agree only at the end.

Who takes part

  • Trader A — half the class. Receives a private estimate of IPO'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. Runs well straight after PD0.

Concepts

  • Price discovery
  • IPO pricing

Roles

  • Trader A

    You are trader A. You trade IPO, a newly issued stock.

    • You receive a private estimate of its 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 IPO, a newly issued stock.

    • You receive a private estimate of its 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

TickerNameMarketStudents can
IPONew IssueContinuous tradingTrade it

In the tracks