Market Microstructure, step 2 of 5
TR3 Multi-Asset Order-Driven Markets
Session timeline
The case
Two stocks trade side by side while three kinds of desk hold different information: asset exchangers working a switch between them, news desks following one stock each, and a proprietary trader reading the pair. STOCK1 opens with a call auction. Assessment happens after the session.
Objective
Exchangers are judged on execution against the session VWAP, on finishing both legs and on staying inside a band. News and prop desks are judged on profit and loss and on the use made of a 20,000-share limit. Nothing is scored live.
What it shows
- Execution, information and relative value in one market.
- Two exchangers trading against each other's flow, each needing the other's stock.
- A ratio with no level: what the prop trader can and cannot know.
Watch out for
- Hurrying an exchange leg pays the spread and moves the price against the next leg.
- A news desk acting on an estimate the other desk has already traded.
- No scores on screen, so nobody knows how they are doing until the debrief.
Who takes part
- Asset Exchanger A — sells 10,000 STOCK1 and buys 10,000 STOCK2 before the close.
- Asset Exchanger B — the reverse: sells 10,000 STOCK2 and buys 10,000 STOCK1.
- STOCK1 News Desk and STOCK2 News Desk — receive valuation estimates for their own stock, and occasional ones for the other.
- Prop Trader — one seat only. Is told the ratio of the two fundamental values at intervals, and nothing about either level.
Class size
Twelve to thirty students: one prop trader, the rest spread over the exchangers and the two news desks. The exchangers need each other, so keep their desks even.
Concepts
- Call auction
- Market efficiency
- News and prices
- Limit order book
Roles
Asset Exchanger A
You act for a client switching between the two stocks: sell 10,000 STOCK1 and buy 10,000 STOCK2 before the close.
KnowsYou receive no valuation estimates. Other desks hold information you do not.
AssessedAssessed after the session on the volume-weighted average price achieved on each leg, against the session VWAP; on completing both legs; and on staying inside a ±4,000 share band around the straight-line path from the opening position to the target.
Asset Exchanger B
You act for a client switching between the two stocks: sell 10,000 STOCK2 and buy 10,000 STOCK1 before the close.
KnowsYou receive no valuation estimates. Other desks hold information you do not.
AssessedAssessed after the session on the volume-weighted average price achieved on each leg, against the session VWAP; on completing both legs; and on staying inside a ±4,000 share band around the straight-line path from the opening position to the target.
STOCK1 News Desk
You are a news trader following STOCK1, and may take a position in either stock.
KnowsYou receive valuation estimates for STOCK1 through the session, and occasional estimates for STOCK2. Other desks hold different information.
AssessedAssessed after the session on profit and loss with closing positions marked at the realised fundamental value, on a ±20,000 share limit in each stock, and on the use made of that limit.
STOCK2 News Desk
You are a news trader following STOCK2, and may take a position in either stock.
KnowsYou receive valuation estimates for STOCK2 through the session, and occasional estimates for STOCK1. Other desks hold different information.
AssessedAssessed after the session on profit and loss with closing positions marked at the realised fundamental value, on a ±20,000 share limit in each stock, and on the use made of that limit.
Prop Trader
You are the desk's proprietary trader, the only one in the room, working the relative value of the two stocks.
KnowsYou receive no valuation estimate for either stock. At intervals you are told the ratio of the two fundamental values, STOCK1 divided by STOCK2, and nothing about either level.
AssessedAssessed after the session on profit and loss with closing positions marked at the closing market price, on a ±20,000 share limit in each stock, and on the use made of that limit.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| STOCK1 | Stock 1 | Call auction | Trade it |
| STOCK2 | Stock 2 | Continuous trading | Trade it |
In the tracks
- Step 2 of 5 in Market MicrostructureA call auction sets the open; news reaches one desk first.