Sony’s PS3 sales came in line with market expectations at 159,000 units. The simExchange market expected 168,000 units to be sold in the month of July. PSP sales were also inline, coming in at 214,000 units, the market expected 209,000 units. Both Nintendo’s Wii and Microsoft’s Xbox 360 surprised the market with 425,000 units and 170,000 units sold respectively. The market had only expected 353,000 units for the Wii and 137,000 units for the Xbox 360. Sales of the Nintendo DS disappointed the market, coming in at 405,000 units. The market had expected 473,000 units.

It appears the market was originally correct when it had forecast the Xbox 360 to outsell the PS3 despite the PS3′s price cut. The market sold off the Xbox 360 July future from the 160,000 units range after believing the leak of the Xbox 360′s upcoming price cut would deter potential buyers, which in retrospect was an overreaction.

Overall, July software sales came in below the market’s expectations at $419.2 million. The simExchange had expected sales about 12.8% higher, between $459 – $487 million. It appears traders were generally bullish this month, expecting 16.79% more in total units for all software SKUs tracked in July.

The following tables compare market expectations on the simExchange and actual results as reported by the NPD Group. Expectations by leading analyst Michael Pachter of Wedbush Morgan are also presented for comparison purposes.

* NPD Group sales data
** The simExchange trading data
*** Games Industry, August 20, 2007

How exactly does this work?

Gamers and developers sign up on the simExchange for a free trading account. Using virtual currency called DKP, players buy virtual futures contracts that are under-predicting sales and short sell futures that are over-predicting sales. This concept is widely known as “the Wisdom of the Crowd” and this system is known as a “prediction market.”

This article was crossposted from the simExchange Official Blog and The simExchange Research.

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.

PS3 sales came in line with market expectations at 98,500 units. The simExchange market expected 98,400 units to be sold in the month of June. Sales of Nintendo DS, Sony’s PSP, and Microsoft’s Xbox 360 exceeded the market’s expectations while Nintendo’s Wii underperformed expectations. Traders likely expected a larger supply of Wii units to be shipped into the US than Nintendo was capable. The PSP’s price cut proved to be a stronger catalyst for sales than the market anticipated.

The PS3 results were the least surprising to the market (off -0.1%), while the Wii results were the most surprising to the market (off +13.62%). The PS3 futures contract was the most heavily traded futures contract on the simExchange with a total volume of 2,511,424 contracts traded. The Wii futures contract was traded for a total volume of 790,629 contracts.

Mario Party 8 lead the pack of software SKUs tracked by the simExchange, beating expectations. Microsoft’s Forza Motorsport 2 came in second, inline with expectations. Electronic Arts’ Harry Potter and the Order of The Phoenix significantly underperformed market expectations.

The following tables compare market expectations on the simExchange and actual results as reported by the NPD Group. Expectations by leading analyst Michael Pachter of Wedbush Morgan are also presented for comparison purposes.

US Hardware tracked by the simExchange in June 2007

US Software tracked by the simExchange in June 2007
(Not the Top 10 software SKUs of June 2007)

How exactly does this work?

Gamers and developers sign up on the simExchange for a free trading account. Using virtual currency called DKP, players buy virtual futures contracts that are under-predicting sales and short sell
futures that are over-predicting sales. This concept is widely known as “the Wisdom of the Crowd” and this system is known as a “prediction market.”

About the predictions

Predictions on the simExchange should become more accurate over time as (1) the diversity of the pool of traders increases and as (2) more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions). Check out the simExchange’s results in May, April, and March.

Copyright and reprinting

The simExchange, LLC retains the right to the content of this article but permits the reprinting of this article with proper credit to the simExchange. Sales data published here includes data disclosed with permission by the NPD Group exclusively for the purpose of settling futures contracts on the simExchange.

This article was cross posted from NPD June sales data reviewed on The simExchange Official Blog.

* NPD Group sales data
** The simExchange trading data
*** Gamasutra, July 16, 2007

There will be no stock IPOs on the simExchange for the week of July 9. Part of the reason is to shift trading activity to the futures contracts. As you may have noticed, the simExchange has been emphasizing the futures contracts lately with redesigns to the site.

The reason we have been putting more attention on the futures contracts is that after collaborating with the NPD Group, people in the video game industry, and those who cover it on Wall Street, we have learned that short-term unit sales data is much more relevant to the video game industry. Lifetime global sales are hard to judge and not as informative to the industry because it does not detail when the sales will occur (within a publisher’s fiscal quarter) and at what price the games will be sold (to forecast revenue). The NPD Group has been very kind to provide us unit sales data to settle our futures contracts to make short-term forecasts possible for the US market.

In the future, we will be using stocks to better judge which games we want to list as futures each month to concentrate trading and provide more accurate forecasts.

This article is cross posted from No IPOs for the week of July 9 on The simExchange Official Blog.

Many veterans have come to notice some problems with trading on the simExchange. No matter how strong the community feels, sometimes the price just doesn’t reflect what the community is predicting.

We continually see this with some overvalued stocks that are strongly shorted, but the volume of short trading just isn’t able to overcome the automated market marker’s wall of buy orders. Back on April 27, we saw news that appeared to shoot Red Steel (Wii) to 95 DKP. As discussed then, an automated market maker has no idea that news has emerged and the stock should be 100% higher than where it is currently trading. Traders would have to buy through each of the automated market maker’s pre-programmed orders to bring the market price to fair value.

Others have noticed that prices would rise on days when many new players join the simExchange and put new money to work. The automated market maker simply was not able to discern between informed trading and noise trading.

Additionally, it can be difficult to close out of positions after a stock stagnates. Buying 10,000 shares and then selling those 10,000 shares weeks later would bring the stock right back to where it was originally.

Some of you might be asking, “What is an automated market maker? And why is he the root of all these problems?” So you should know by now that in a stock market, you are buying and selling shares with other traders. However, when no trader is currently posting orders to sell, you would have no way to buy shares. In the real stock market, there are people who take the role of specialists or market makers who just post orders to buy and sell (this is called market making) all day long. They do this because they can earn a return by buying low and selling high. Notice that you do not buy at the same prices you sell at. You buy at the price the market maker wants to sell at and you sell at the price the market maker wants to buy at. The simExchange uses an automated market maker system that provides market making services in place of a human trader so that you can always buy and sell whenever you want–24 hours a day! However, automated market maker 1.0 just wasn’t too bright and couldn’t cut it.

We took a look at how to solve these problems, and we are proud to announce the brand new, patent-pending, more intelligent automated market maker. The new simExchange automated market maker better discerns informed trading from noise trading to provide more responsive price changes that are also robust from manipulated trades.

You can now close out a position over time and experience less price impact–meaning, if you sell off your 10,000 shares at 1,000 shares a day, the price will decrease a lot less than if you sold all 10,000 shares that day, getting you better prices.

We will be rolling out this new technology tonight. So when you wake up tomorrow and eagerly dash to your computer to play the simExchange, the new market maker will be waiting to trade with you for even more exciting trading action.

Cross posted from The new market maker is coming! on the simExchange Official Blog.

US Hardware May 2007

How exactly does this work? Gamers sign up on the simExchange for a free trading account. Using virtual currency called DKP, players buy stocks and futures that under predict sales and short sell stocks and futures that over predict sales. This concept is widely known as “the Wisdom of the Crowd” and this system is known as a “prediction market.”

The simExchange did not trade monthly hybrid futures for game software this month. However, NPD’s Top 10 is still relevant for comparing how trading on the simExchange is forecasting lifetime, global sales of the games.

Although data is still limited, initial predictions on the simExchange video game prediction market appear to be relatively accurate (compared with traditional predictors), and in some cases, absolutely accurate (compared with the actual result).

Predictions on the simExchange should become more accurate over time as more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions).

If you enjoyed this post, please consider Digging it through the original: NPD releases May sales data, Crowd vs Expert compared on the The simExchange Official Blog.

* NPD Group sales data
** The simExchange trading data
*** GameDaily Biz, June 11, 2007

US Hardware March 2007

NPD has released its findings for US April 2007 video game sales. The following charts compare actual sales numbers determined by the NPD Group with forecasts from market trading on the simExchange and predictions by leading Wall Street analyst Michael Pachter of Wedbush Morgan.

US Hardware April 2007

The simExchange did not trade monthly hybrid futures for game software this month. However, NPD’s Top 10 is still relevant for comparing how trading on the simExchange is forecasting lifetime, global sales of the games.

Although data is still limited, initial predictions on the simExchange video game prediction market appear to be relatively accurate (compared with traditional predictors), and in some cases, absolutely accurate (compared with the actual result). The prediction market out performed the analyst on every prediction in March and was split in April.

Predictions on the simExchange should become more accurate over time as more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions).

Joining and playing the simExchange is completely free and does not involve any real money. To play, sign up here.

* NPD Group sales data
** The simExchange trading data
*** GameDaily Biz, April 13, 2007
**** GameDaily Biz, May 14, 2007

Cross posted from NPD releases April sales data, prediction market and analyst compared on the simExchange Official Blog.

Previously: Accounting sales of digitally downloaded games, Next lesson: so the “futures” aren’t really future, So what exactly are these “futures?”, The structure of the simExchange stocks and An invitation to join the simExchange beta.

With the listing of LittleBigPlanet, the simExchange community has been a flurry on how the stock should account for the game’s sales. So far, operators of online gaming stores, Microsoft and its Xbox Live Arcade (XBLA), Nintendo and its Virtual Console (VC), and Sony and its PlayStation Network (PSN), have not publicly released unit sales data for game titles purchased on their online stores.

In the past, some amateur third-party studies have attempted to estimate such sales by intentionally scoring very low while playing the game and then submitting their scores to the rankings to see how low they go. This approximated the number of purchases based on those players who submit their scores. However, it is uncertain what portion of total customers actually submit their scores to the rankings.

LittleBigPlanet was listed on the simExchange on May 9, 2007. Current understanding of the game’s distribution is that it will be released in retail packaging along with direct sales through PSN. No downloaded game has been listed on the simExchange in the past. This has resulted in questions on how to price LittleBigPlanet’s stock on the simExchange. Should the stock count only the sales through retail (like other game stocks) or include the sales delivered through online distribution (which appear to be difficult to estimate).

Such a hybrid distribution is relatively new and it is uncertain how the industry will account for all this in the future. However, hybrid distribution has been done before with Valve’s retail and Steam release of Half-Life 2. Would anyone argue that sales of Half-Life 2 over Steam were any less relevant than sales at Best Buy?

One goal of stock trading on the simExchange is to provide relevant forecasts for the gaming industry. Sales of LittleBigPlanet conducted over an online store are no less relevant than retail sales to Media Molecule (the developer of the game), Sony Corp (one benefactor of a successful game on the PS3 platform), and watchers of the industry (who are evaluating if such a product is worth developing).

But aren’t online sales difficult to estimate for outsiders if Sony doesn’t break out numbers? The very structure of simExchange game stocks has always assumed the difficulty of ascertaining exact sales information and has always relied on analysis and extrapolation.

What is the point of having a prediction market track something that Sony Corp would already know with certainty? Although Sony likely would not need a third-party source to track its digital sales, trading on the simExchange is a forecast of what is to come, and not simply for tracking the past. Of course, having more reliable past sales data is advantageous for running forecasting models, a prediction market can still be applied to provide another perspective of the future.

Given this, it would make most sense for the LittleBigPlanet stock, and any similar stock, to represent the total sales of the underlying game, regardless of physical or digital distribution. The information problem is a similar one while the goal is the same.

Cross posted from Accounting sales of digitally downloaded games on the simExchange Official Blog.

Previously: Next lesson: so the “futures” aren’t really future, So what exactly are these “futures?”, The structure of the simExchange stocks and An invitation to join the simExchange beta.

At the same time, anyone selling the stock at 47.86 DKP would be giving away money. Naturally, no rational person would be selling at 47.86 DKP if the news already reveals the stock should be worth over 95.00 DKP. Unfortunately, the simExchange relies on NPC market makers (NPC is a gaming term meaning “Non-Player Character”) that do not take news into account when they make markets and so the prices would not immediately reflect the news unless traders bought every automated ask order up to 95 DKP.

Remember, stock markets function in an auction system where a bidder and seller each have a price they are willing to buy and sell at. When there is a match–a buyer and a seller willing to transact at the same price–a trade is filled. Due to these mechanics, a stock’s price can easily jump from one trade to the next as the last traded price does not directly affect what price buyers and sellers can trade at next.

Following large news events, such as earnings releases, you will often see a jump in the stock price. A stock may have just traded at $100. News is released that shows the company is growing much faster than previously believed. The market makers now believe the stock is worth around $120 a share. They don’t just keep posting sell orders around $100 and let buyers gradually push the price of the stock to $100, they immediately post that they are willing to sell at no less than $120 a share. Buyers who believe the stock is worth more than $120 a share will immediately adjust their bid orders to $120 as they know they are not going to get the shares at $100. The stock price would immediately jump from $100 to $120 with no trades at any price in between.

As previously mentioned, the NPC market makers on the simExchange are not aware of news that should adjust their bid and ask prices. It is unrealistic for them to keep posting sell orders below 95 DKP if the news already shows the stock should be worth 95 DKP. As a result, the bid and ask orders were manually adjusted to compensate for this new information, as would be done in the real stock market.

It is easiest to notice and understand this by viewing what are called Level II Quotes (advanced trading mode on the simExchange). This view lets you see the order book: the collection of orders people are posting as offers to buy or sell. A trade only fills when someone submits an order that matches an order in order book. If there are no sell orders submitted at 50 DKP, then you cannot buy at 50 DKP. You can always submit an order to buy at 50 DKP and wait for a seller to come by who is wiling to take your offer. However, if there are no orders to sell below 90 DKP, then 90 DKP is the only price you can immediately buy at. This system is often referred as a “double call auction.”

Cross posted from A lesson in stock trading mechanics on the simExchange Official Blog.

Previously: Next lesson: so the “futures” aren’t really futures, So what exactly are these “futures?”, The structure of the simExchange stocks and An invitation to join the simExchange beta.

So now you’ve got a taste of what futures contracts are like…shorter-term projections and an expiration process. New questions like “to close out the position before expiration or let it expire?” now ring through your head. As the simExchange evolves its futures market, you learn what exactly are these derivative contracts.

The next lesson in your adventure to learn more about futures is that the “futures contracts” on the simExchange are not really how futures in the real world work at all. As you may have noticed, when going long on a future, DKP is deducted from your cash pile, and when shorting a future, DKP is added to your cash pile. This isn’t really how futures trading works. Most people will never trade a futures contract in their lifetime, but with today’s online trading, the barriers to accessing more sophisticated products are decreasing for the average investor and it is good to learn how it really works.

As mentioned in So what exactly are these “futures?”, a futures contract is an agreement between two parties to trade something at a set price at a set date. If you are the buyer, you are obligated to buy at the set price on the set date. However, you do not pay until you actually buy the thing on the set date. No cash changes hands when you enter a futures contract. Instead, you must post margin (make a security deposit) with your broker to cover potential losses. The amount that you have to deposit varies with the risk of the contract you entered. When your losses on the contract exceed the amount of deposits you have left with your broker, the broker will call you every day in what is called a “daily margin call” and ask you to deposit enough cash to cover the loss.

What difference does this make? In the simExchange you have to pay cash for the future. In the real world you merely make a deposit–the money is still yours so you still earn interest. Since you don’t currently earn interest in the simExchange game, this would not appear to be a big deal. However, in the real futures market, you only have to deposit a small percentage of the contract value as margin, not the 100% cost on the simExchange. This would allow you to achieve great leverage, playing $10,000 of contracts with just $1,000.

The difference is more substantial on the seller’s side. On the simExchange, the shorter actually gets DKP when shorting the futures contract. In the real futures market, the shorter enters the contract and posts margin in the same way the buyer does.

In fact, other than expiring, the simExchange futures do not actually function as futures. Part of this is to aid the learning process of helping players think about futures after just learning about stocks. The other part is that we have not yet decided how the sophisticated margin rules of trading futures should be translated in a way appropriate for the simExchange community. For now, you can think of futures contracts on the simExchange as “hybrid futures.”

Cross posted from Next lesson: so the “futures” aren’t really futures on the simExchange Official Blog.

Previously: So what exactly are these “futures?”, The structure of the simExchange stocks and An invitation to join the simExchange beta.