Thursday, November 17, 2005

Brought Down the Class 
So it turns out that I was a little modest about my role in the blow-up in Dynamic Markets on Monday.  The way the simulation was designed the price of this one stock that many people were shorting was supposed to go from 10 to 16, thus likely liquidating one or two players and pushing the stock up to about 32 as they buy to cover their positions and in the process sinking a few other funds.  It would teach everyone a lesson and set up a nice lecture.

Enter Mark, lone trader for the Bringing Down the Class fund.  I was short about 7x more shares than any other fund, and about 8x more than the professors thought anyone would be dumb enough to hold.  When the price of this shorted stock moved from 10 to 16 I was liquidated, and due to my liquidation alone the price shot up to 112, far above the 32 the professors were planning on.  Now, since in about a second I took the price to 112, about 9 other funds liquidated.  The liquidation of those funds pushed the price to around 450 and caused four more fund liquidations, effectively sinking funds that only had a few percent of their portfolio in the position.

In a very real sense I recreated almost exactly what happened in When Genius Failed.  Yesterday my teammate, who unfortunately will be suffering the effects of my trading along with me, forwarded me an e-mail I sent to him the night before the trading simulation.  The last line?

“…Those [trades] are really risky, so I can’t go too deep in them.”

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