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SIMULATIONS

Market maker - Risks

Market maker - Risks

Practice market making in a volatile market

Simulation Market maker - Risk   ASMB_EZP3_US_V5

Simulation scenario

In this simulation you will practice the market making activity in a volatile market. Today news - good or bad - may arrive to the market and make the stock price move - up or down. You will participate to the financial market where the stocks of the EasyPlane firm have been issued (ticker symbol: EZP).

Your goal is to maximize your trading gain with your market making activity.

At the start of the simulation, you own an account worth € 50,000 in cash and 5 000 EasyPlane shares.

The duration of the simulation is initially set to 10 minutes, which corresponds to a 24-hour day. Using the TimeLine, you can increase or decrease the simulation speed at any time.

You can relaunch the simulation as many times as you wish.

Grading

Your grade for this simulation (25 points) takes into account the launching of the simulation (5 points), your determination to go to the end of the simulation (10 points) and the sending of at least one order to the market (10 points).

EasyPlane company

EasyPlane is a low cost airline company. Founded at the beginning of 2010, EasyPlane mainly serves big European capitals with some flights towards the United States and Asia as well.

As its name suggests, EasyPlane’s goal was to make it easy for passengers to take a flight. For this, EasyPlane uses new technologies to automate all the process: from ticket purchase (website and mobile app) via boarding (triple recognition of the person based on fingerprints, face and voice, visual and sensory scanning of the luggage) up until the actual flight (online ordering of drinks or meals and service provided by robots). Even the airplane is piloted remotely with an expert system helping the only pilot in the cabin.

For the firm, this innovative approach allowed to have much lower operating costs compared to those faced by the competitors still improving passengers’ safety. This approach attracted very much the generation Z formed by young people who were born in the era of new technologies, always connected and who do not have the time to lose their time.

Evolution of the stock price

Privately held for a long time and very well valued by the funds that believed in this project from the beginning, the unicorn EasyPlane publicly entered the market only two years ago. The stock price took off phenomenally right after the quotation: started off with a price equal to €45, some months afterwards the stock price got already multiplied by 5! In order to make the price more attractive for the investors, recently the firm had to divide by 20 the value of its stocks (stock split).

EasyPlane is followed by around 15 financial analysts. In particular, market participants are very much looking forward to the recommendations coming from Marina Boat and Douglas Flint, and their recommendations (not always concordant) often have a significant impact on the price of EZP stocks.

Since several weeks, the stock price of EZP has experienced some ups and downs, and ranges around € 10.

The ticker symbol of EasyPlane is EZP.

What will happen today...

Today, we will follow with great interest the publication of the GDP of the European Union at 8am. Many studies have shown that the GDP represented by far the main factor affecting the development of the air transport market, for both business class and economy class. The study of historical stock price of EZP also highlighted that the GDP had a significant impact on firm business, with an asymmetric effect: statistically speaking, a 1% increase of the GDP gets translated into a 10% increase of firm value; on the contrary, a 1% decrease of the GDP causes a 15% decrease of firm value.

During a meeting with investors, EasyPlane will announce its quarterly results around 2pm. The market consensus predicts a profit of M€ 130 in line with the current EZP stock price equal to € 10. The announcement of a higher profit with respect to market expectations should get translated into an increase of the stock price, whereas the announcement of a lower profit than expected into a decrease of the stock price.

The European Parliament should vote today for a law that taxes flight tickets in order to finance the fight against climate change. The result of the vote should be publicly available at the beginning of the evening. If the airline companies had to charge this cost into ticket prices (approximately +5% as far as EasyPlane is concerned), customers’ demand should significantly drop (high price elasticity for the demand in particular for the low cost companies), with a decrease in revenues that would get translated into a decrease of future profits. If the airline companies would not take into account this cost into ticket prices, then the margin per ticket would be reduced of the same value. Whatever the approach adopted, the approval of this law would be a bad news for the airline transport sector. The market seems to have anticipated the result of the vote about the tax to fight against climate change, given that the sector index strongly slumped since the beginning of the year. But no doubt that the airline companies have organized their lobbying in Brussels in order to influence the result of the vote tonight!

You can read the market consensus that gives some numerical estimates.


What you are going to learn

The simulation Market maker - Risk allows to discover the conditions of the market making activity as well as its relevance for the market.

Teaching objectives: The simulation Market maker - Risk will be the opportunity to understand the factors of the market making. In which market conditions is market making profitable? What is the social utility of market making? What are the risks associated to market making?

Learning goals: this simulation will allow you to understand in practice the following features of trading:

  • Define a market making strategy
  • Evaluate market liquidity
  • Manage dynamically your market making activity

After or during this simulation, you can learn more on market making by following the associated courses to this simulation.

Download the case note to help you during the smulation.

About the author of the simulation

Professor François Longin
ESSEC Business School

« Market making activity improves market liquidity. »