Market Microstructure, step 4 of 5
PD2 Asymmetric Information
Session timeline
Briefing
Trading40 min
Debrief
The case
One equity trades between three traders. Each receives a private estimate with an error band.
Objective
Trade EQ toward its value. Assessed on profit and loss, with closing positions valued at the final value.
What it shows
- Asymmetric information: nobody knows the value and everybody knows part of it.
- Averaging: the price as the combination of three noisy estimates.
- An error band as a size of doubt, which differs by trader.
Watch out for
- Treating a tight band as a certain value.
- Trading against a price that already holds the other two estimates.
- An estimate that turns out wrong while the price, which combined three, was right.
Who takes part
- Trader A, Trader B and Trader C — a third of the class each. Each receives a private estimate of EQ's value with its own error band, updated every eight minutes.
Class size
Twelve to thirty-six students, a third in each role. With fewer than twelve a role has one or two traders.
Concepts
- Adverse selection
- Price discovery
Roles
Trader A
You are trader A. You trade EQ.
- You receive a private estimate of its value with an error band.
- Traders B and C receive different estimates.
- Assessed on profit and loss, with closing positions valued at the final value.
Trader B
You are trader B. You trade EQ.
- You receive a private estimate of its value with an error band.
- Traders A and C receive different estimates.
- Assessed on profit and loss, with closing positions valued at the final value.
Trader C
You are trader C. You trade EQ.
- You receive a private estimate of its value with an error band.
- Traders A and B receive different estimates.
- Assessed on profit and loss, with closing positions valued at the final value.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| EQ | Equity | Continuous trading | Trade it |
In the tracks
- Step 4 of 5 in Market MicrostructureOne trader holds a better estimate than the rest.