Market MicroStructure Assignment
Questions:
Part 1.
Describe the difference in Queues between the Returns Market in the IEM and the Minnesota Grain Exchange? What uncertainty is there for the trader in the IEM because of the size of Queue that is not present for the trader on the Minnesota grain exchange. How would you as a trader behave differently if you knew precisely what was in the Queue at any point in time. Who has knowledge of the Queue for a security such as IBM Common Stock traded on the New York Stock Exchange. Would knowing the Queue for a security in the New York Stock Exchange lead you to behave differently than knowing the Queue in the IEM.
Part 2.
Who is responsible for creating the bid ask spread in the Iowa Electronics Market. In the Minnesota Grain Exchange? In the New York Stock Exchange? If you alone were allowed to set the bid ask spreads and then had to guarantee trades in a particular security based on those spreads what risks would you be exposed to compared to the case when the spreads are a consequence of the various buyers and sellers who choose to participate in the market?
Part 3.
Discuss what is meant by an informational advantage in the IEM? What would it mean to have an informational advantage in Hard Red Spring Wheat at the Minnesota Grain Exchange? Give examples of pieces of information and how they might lead to trading advantages in the New York Stock Exchange?
Part 4.
In the Minnesota Grain Exchange what information system exists to guarantee that the produce delivered is in fact the product promised for sale? Be thorough. What mechanism exists on the IEM and the NYSE to assess the quality of the item offered for sale? Outline problems that exist in the NYSE that do not exist in the Minnesota Grain Exchange for assessing the quality of the item sold. What institutions appear to have evolved which are concerned with assessing the quality of capital exchanged.
Part 5.
In any exchange there are spending constraints. In the IEM these are fairly simple. Explain. How are spending constraints enforced in the Minnesota Grain Exchange. How about the NYSE? What is meant by margin trading? How is margin trading enforced?
Part 6.
This part of the assignment is to be based on the materials you have studied in Professor Paul Johnson's course and your participation in the marketplace. In particular we want to focus on the issue of learning. We want you to distinguish individual and organizational learning and examine different ways to think about them.
Individual Learning:
1. What are the things an individual must learn to do in the Iowa Electronics Market? What types of decisions does the person make? Where does the information come to make decisions? Do all people use the same information?
2. In what sense are the decision makers boundedly rational in this marketplace? Note that here you can reflect on your own decision making. Do they reflect any of the information processing attributes described in Kahneman and Tversky.
3. Using the suggestions from Professor Johnson's class, how might you change the environment to help the individual decision maker.
Organizational Learning:
1. What is a market decision vs an individual decision? In what sense for example is a market price in the auction in which you have been participating a consequence of the behavior of the market as a whole rather than a single person?
2. If we focused on market prices, what would it mean for the market to learn? Can you relate this at all to the idea of a market being efficient? There is a poplar belief among some groups that market may be efficient even though individuals are irrational. what would this mean in our setting? On the other hand are there limits to our understanding fully the rationality of the market?
