Since the launch of the simExchange, stocks and futures contracts have debuted at a price suggested by the submitter of the game with some adjustment by the admins of the simExchange. This price was generally too high or too low, resulting in sharp price moves following the IPO and windfall profits. This is expected as the forecast of an individual inefficiently aggregates information compared against a market. Although many traders have come to expect windfall profits from an IPO (possibly from the irrational exuberance of the 90s tech bubble), this is not how an IPO is supposed to work.

To remedy this problem, the simExchange began the use of an experimental new IPO process to determine the IPO price. We evaluated many IPO processes such as Dutch auctions and Parimutuel Auctions but decided on a Double Call Auction to keep the process simple. A double call auction is how trading on the simExchange has always functioned. The only difference from standard trading is that the automated market maker is turned off.

Price discovery works through traders submitting buy orders at the maximum price they are willing to buy at and submitting sell orders at the minimum price they are willing to sell at. Essentially, traders are posting a range of how well they think the game will sell—a maximum and a minimum.

For a single trader, this range may be very large. They may think a game will sell a minimum of 400,000 copies (40 DKP) and a maximum of 600,000 copies (60 DKP). This would equate to a buy order at 40 DKP and a sell order at 60 DKP. With this player’s orders alone, the bid-ask spread is a very large 20 DKP.

However, a second trader may believe the game will sell at least 500,000 copies (50 DKP) and at most 650,000 copies (65 DKP). The trader’s orders represents a 15 DKP bid-ask spread, but together with the other trader, the best bid is now 50 DKP and the best ask is now 60 DKP. The bid-ask spread is now 10 DKP.

A third trader believes the game may only sell 300,000 copies (30 DKP) with a max of 550,000 copies (55 DKP). The bid-ask spread is now 5 DKP. The order book would look like this:

As more traders submit orders, the bid-ask spread will tighten and converge on a market price. Individually, no one knows what the IPO price should be, but together, traders can narrow the range down substantially. This price range should be the best guess of a fair IPO price as this is where the buyers and sellers meet (the optimists and pessimists for the game’s potential sales). In this IPO process, trades only occur when traders are willing to buy and sell at the same price. Once again, this is no different from normal trading except there is no automated market maker submitting orders.

However, this process has proven to be difficult to understand for many members of the simExchange, especially those who use the Basic Trading mode, which is limited to placing market orders (orders that immediately take the best available price). If a trader is not used to looking at what is the current selling price, he may be in for a surprise when his buy order fills.

Originally we had considered reserving the IPO process only to those using the Advanced Trading interface so that traders are forced to identify the matching price they would accept. However, we thought traders using the Basic Mode should still be allowed to participate if they see a price they think is good for buying or selling. Of course, this assumes the trader using the Basic Trading mode is paying attention to the current bid and ask prices. However, many traders using the Basic Trading mode ended up with prices they were not happy with.

Last night, we have heard a deep debate regarding the IPO process. Our goal is to make accurate forecasts in an entertaining and easy to play process. It appears the experimental IPO process has failed to accomplish those goals for many traders.

Based on user suggestions, we will combine the experimental process with elements of the original IPO process into a 2-step IPO process. Once a stock or future is listed on the simExchange, there will be a stage to determine the IPO price. This will be a three-day period in which players place orders in a double call auction. To participate in the double call auction, the player must specify the maximum price he will buy at or the minimum price he will sell at. After the three-day period, an IPO price will be calculated. At this point, the second stage will occur with the stock or future available for purchase or shorting at the IPO price all day by all traders. Following this day, regular trading with automated market maker will commence.

This article was cross-posted from Discovering an IPO price dated July 26 on The simExchange Official Blog.

From: ECON-GRAD-L [mailto:XXXXXXXXX] On Behalf Of Ashley Boggs
Sent: Wednesday, 18 July 2007 2:05 a.m.
To: [email protected]
Subject: A New Regime for ICES Students
Importance: High

Dear ICES Students:

While this letter is for those economics PH. D. students who consider themselves part of the ICES program, it is being sent to all students on this list server because I have no way to identify those students until they advance to candidacy. All ICES faculty except Professors Houser and McCabe will be leaving GMU for Chapman University in Orange, California. The only unsettled question at this writing is whether they will leave next month or next year. Which departure date they choose, however, has no substantive impact on the contents of this letter.

So if you are an ICES student who has not yet advanced to candidacy, you need to read this letter. And even if you have advanced to candidacy, you should also read on because you can be affected by these changes as well. Indeed, I will divide the remainder of this letter into two categories that relate to those two sets of students.

NOT YET ADVANCED TO CANDIDACY

Ph. D. students are required to pass two field exams in addition to micro and macro exams before advancing to candidacy (and also to accumulate 48 hours of course work and have your dissertation proposal accepted by your dissertation committee). For students who have chosen to work within the ICES program, the requirement of field exams as been abolished because participation in the ICES program involves an extensive and intensive set of activities beyond the 48 hours of course work that serves in lieu of field exams.

Starting now, this abolition is abolished. From this point on, all Ph.D. students will have to pass the requirement of two field exams before advancing to candidacy. Starting January 2008, we will add experimental to our list of field exams, with Professors Houser and McCabe serving on the committee (and with a third faculty member to be named later).

Those ICES students who entered GMU in August 2006 are clearly subject to this new rule, as you are now only at the stage where you are now about to take the micro and macro exams.

ICES students who entered prior to August 2006 but who have not yet advanced to candidacy are in a different, more compromised position, and it is you who are the prime intended recipients of this letter. Only I don&#8217-t know who you are, so you must identify yourselves to me if you want to file for an exception to this change in rules.

Here is the deal: if you want to be exempt from the new requirement of two field exams (one of which would, presumably, be experimental), you must write me to this effect by 1300 on Friday 24 August 2007. If I do not have your request for exemption in hand by that time, you automatically will be subject to the requirement of two field exams.

If you do request an exemption, I will adjudicate your request. Let me note briefly the principles I will follow in that adjudication. The prime issue I will look at is whether you are almost ready to advance to candidacy. You must present me with evidence and testimony to this effect- in some fashion you must show me that you are well along in the process of forming a committee, and are not just thinking about doing so.

Another issue arises at this point, but it pertains as well to those ICES students who have already advanced to candidacy, so I will cover that issue in the next section of this letter. So please read on.

ALREADY ADVANCED TO CANDIDACY

GMU policy states clearly that all three members of dissertation committees must be full-time GMU faculty members at the time the dissertation is defended. For some of you, the precise character of your futures depend on just when the ICES faculty leave GMU. The principles in play, however, are invariant to that departure date.

If you can defend your dissertation before those faculty leave, you are done regardless of when they leave. But if they leave before you are able to finish, you will have to reconstitute your committees. At this point, expectation and anticipation enters the picture. If you truly expect to finish before they leave, it&#8217-s smart to stay on your current heading. If not, you will have to change your heading through re-constituting your committee, and doing that sooner rather than later will surely contribute to your timely completion.

As for those students who have not yet advanced to candidacy, some of you might be in the position of being almost ready to do so, and to do so with those faculty who will be departing. If they don&#8217-t depart until 2008 and if you and they conclude that you can finish before their departure, you should continue with your current plans and I will grant your request for exemption from the field exam requirements.

SUMMARIZING AND MOVING ON

I realize this is a terribly long letter, and is irrelevant to nearly all of you as well. For this imposition I apologize, but I know of no other way to deal with this situation. Let me summarize: (1) we will start offering fields in experimental in place of the ICES program- (2) all students are now subject to the requirement of two field exams before advancing to candidacy- (3) ICES students who have not yet advanced to candidacy can petition me for exemption by demonstrating both that their committee formation is at hand and that everyone involved is convinced that the dissertation will be defended before the
departure of the ICES faculty.

By way of one final remark while I am thinking of it, let me also say that I subject all requests for exceptions, exemptions, appeals, and the like to rigorous scrutiny. The simple economics of this situation is that I bear the costs of these actions, and in two respects: (1) there are supporting documents I must prepare at the time and (2) there is even more work I must bear in the form of even more documentation if you don&#8217-t conform to the initial promises.

Doing the latter is something I dislike especially intensely, and to avoid having to do this is the reason I apply rigorous scrutiny to all such cases in the first place. If I carry forward your case to higher authorities, it will only be because you have convinced me that I will never be asked to repeat that action. Therefore, do not presume that I will automatically support your petitions, for I will not do so unless you present me with compelling reason to believe that I will not again have to have such matters cross my desk.

Yours Sincerely, REW

Richard E. Wagner
Department of Economics, 3G4
George Mason University
Fairfax, VA 22030
Phone: 703-993-1132
Fax 703-993-1133
Home page: http://mason.gmu.edu/~rwagner

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