Constructing Internet futures exchange for teaching derivatives trading in financial markets

摘要

Simulations and games are widely accepted as a powerful mode of teaching and learning. This is especially so in the field of finance in teaching students the intricacies of stock market trading. In this study, we leverage the power of Internet technology and design a fully functional Internet futures exchange. With respect to academic research, we provide an example of the use of our Internet futures exchange as a research platform to address the issue of market transparency and front runners. This, in itself is an important research question since market transparency level lies at the heart of controversial debates. Empirical data gathered from a controlled laboratory setting may help resolve the controversy. Previous laboratory studies addressing this issue use simplified representations of financial exchanges based on simulated securities whose values are chosen randomly form some predetermined distribution. For our study, we construct a fully functional futures exchange based on real underlying securities on the Internet and conduct our experiments on this exchange. Our obtained results should be more robust than those obtained from simplified financial exchanges used in previous studies. We also analyze the relation between market transparency and front runners. No previous research has been done analyzing this issue in detail. In our study, we make use of our constructed fully functional Internet futures exchange and gather empirical data under alternative exchange designs and varying levels of transparency and front-runner participation. The effect of varying levels of front runner participation on the bid-ask spread and on trading gains and losses can be tested for. Additionally, the effect of varying levels of front runner order quantity (order size) can be tested for.