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.

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.

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.

Users submit the games they want to trade. Users also submit articles, images, and videos about the games. The community votes through a unique “content bidding system” to measure the value of submitted content to the community. This makes it easier for users to learn about games by quickly seeing the most valuable content about the game available and allows traders to more easily value the game stocks up for trading.

The simExchange is also a great opportunity to learn about the stock market by trading stocks that gamers care about. Unlike many prediction markets, the simExchange follows real market mechanics, such as a double call auction order system. The simExchange allows players to actually short stocks.

Games Stocks:
- The stock price forecasts the game’s lifetime worldwide unit sales. 1 DKP corresponds to 10,000 copies sold.
- Game stocks are perpetual and are structured similar to real stocks.
- Users can submit the games they want listed on the simExchange for trading. Users bid on games to indicate demand for that game’s listing.
- Read more about the stock structure here.

Trading Features:
- A virtual stock market that follows real stock market mechanics such as a double call auction order book (CDA form prediction market).
- Users can place limit orders and short stocks
- Players learn to manage margin. Will receive margin calls and forced liquidation if leveraged position moves against them.
- Liquidity provided by automated and human market makers.

User Interface:
- AJAX interface enables user to dynamically pull up a stock’s order book by clicking on a stock. No need to enter stock prices.
- Option for basic trading (market orders with easy to understand bid and ask) or advanced trading featuring limit orders with Level II Order Book.
- Level II Order Book auto-updates best bids and asks orders.
- Portfolio, Quick Portfolio, and Order Status pages auto-update balance, margin, and positions.
- Find stocks by browsing genre or platform or searching title or summary content
- AJAX forms dynamically appear and change content

Content System:
- All game stocks are accompanied by a succinct but comprehensive summary so that traders do not need to leave the site to learn about the underlying game.
- Extensive resources provided by articles, images, and videos submitted by the community give traders quick access to the news that can move the stock.
- The community bids on content using the simExchange Content Bidding System to determine the value of the content to the community.
- The news aggregator is part of the overall simExchange game; players earn DKP from submitting valuable content and posting intelligent comments.

The simExchange is currently in public beta and I welcome anyone to join and share feedback.

If you would like to learn about the development of the simExchange, you can follow everything from the beginning by reading the simExchange Official Blog. The first post discussing how I came up with the idea starts here. We are also currently exploring ways to provide the simExchange technology to third-parties. You can always contact us through the form in the simExchange’s Help section.