Recent news stories about insider trading and the conviction of a hedge fund manager reminded me of a simulation we used to run that is just as relevant today. This simulation is different from the ethics simulation I wrote about elsewhere in the blog. The ethics simulation focuses on the individual decision: when faced with the situation, will you make the ethical decision? The insider trading simulation focuses on groupssharing insider information for mutual profit.
In the simulation, traders receive insider information about the prospects of a company. Prior to trading, they are allowed to exchange messages; they can choose whom to communicate with, and if they receive a communication, they can choose to see it or not. They know who is sending them the communication. After the communication, the stocks are traded in the FTS Interactive Markets; in these markets, the trader buy and sell the stocks from each other, and in the particular simulation, the trading mechanism was a double auction where everyone is a dealer, so they trade for their own account. There were cash prizes for the best performers, and all the information they received from the system was correct (and so unambiguously useful).