Post-Game Reflection Report on Trading Strategies for Informed and Liquidity Traders

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Post-Game Reflection Report
Objectives of Session 2
In this session I was trading as an informed trader, hence, I had information about the
prediction of the true value of the stock. The objective of this session was to examine the effect
of trading by privately informed investors and liquidity traders on the price discovery process.
My objectives were to make a profit from the private information, make accurate transactions
and limit the impact of my trades on the price of the stock by making many small orders to avoid
disrupting the market balance. In this session, I expected the informed traders to take advantage
of any market mispricing compared to the predicted value of the stock, as they are privately
informed. The informed trader would be expected to sell share if the predicted value true value is
less than market value and buy the stock when the predicted true value exceeds the market price
of the share so as to maximize their profits. These informed participants will trade in a small
batch to avoid disclosing their information to other traders through the flow of buy/sell orders.
For example, if the informed player places large buy order the other players will study the
information implied by this large buy order hence wait for the price to increase rather than sell at
that moment. However, when the information the informed traders has is close to being made
public they will trade aggressively so as to profit before other traders become informed. The
liquidity traders would trade depending on the limited public information provided and how they
expect the information to affect the value of the share. However due to actions of the informed
traders and uninformed traders who can closely predict the true value of the stock using the
public information the market price will move toward the true value. The actions of these traders
will either increase the demand of shares if they think the stock is undervalued or supply of the
shares if they think the share is overpriced causing the equilibrium price to shift toward the
expected true value. When most participants believe that the stock is overvalued, the supply of
share will outstrip the demand leading to a decrease in the stock price. On the other hand, when
the feeling amongst most traders is that the current stock price is below the true value the
demand of the share will exceed the supply leading to an upward pressure on the price of the
stock. The objective was to maximize the profit and since all traders can place unlimited orders I
would expect informed traders to buy or sell all their shares as they insider information.

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Trading session 3
In this session, there were no informed traders and all the participant were trading as just
publicly informed traders or liquidity traders. The objective of this session was to follow the
rules, analyze the flow of buy/sell order to predict the direction of stock price and use financial
analysis skills to try to predict the true value of the stock using the public provided new with aim
of maximizing the profit. The objective of following the rule specifically meant that if one draws
a liquidity shock then they would first fulfill liquidity target to avoid penalties. I would,
therefore, expect traders will first fulfill their liquidity shock draws before trading based on their
understanding of the publicly released news. I would expect different participants to react
differently to the information they receive about the company depending on how they interpret
the news. However, I believe most traders have financial knowledge and would predict the
direction the stock price will move depending on their valuation of the true value of the stock
using the public released news and the last closing value of the company. The participants would
also be expected to study the flow of buy or sell orders to evaluate how most traders are reacting
to the news released. So after the traders have met their target they would then embark on the
objective of maximizing their wealth for example if the liquidity target was to sell 5000 shares
but the trader believes the stock is underpriced according to their analysis of information
received. The traders would then start buying the shares of the stock as many as they can to
profit on the expected increase in the price of the stock. In contrast, if the traders received a buy
liquidity shock, and actually believe that the stock is undervalued, they would continue buying
the shares even after achieving the liquidity target. This would continue up to point where their
valuation of the stock is matched or exceeded by the market price of the shares. As the traders
pursue profit maximization objective, the market forces of supply and demand would push the
market price toward the true value. Therefore, the trade price series would follow the trend that
most traders believe the stock price head to a given time.
Trading strategies for the informed trader session
For this session, I traded with private information and I could therefore accurately know
how the price of the stock would move. My strategy was to trade on this information stealthily to