Producers and Consumers

I have been asked to extend the number of participants to 30 instead of the original design. This gives me the opportunity to introduce a new set of players which complete the list of participants in a trading environment. I take the cue from commodities that have producers and consumers (PR, CO for short).

Each PR and CO start with an open position which is marked at the beginning either at the theoretical price or at the mid of the opening price shown by the MM, doesnt really matter. The size of the PR and CO should be the same, but if you want to have more than one PR and CO, you should have more PRs than CO. Key is that the sum of all positions should be net zero but large from a gross point of view.

PRs are naturally long as they benefit from a bull market, so they start with a long position. COs are naturally short as their costs increase in a bull market, so they start with a short position.

The motivation for each PR and CO is to break even or make money by winding down their exposure. Their decision making is one of timing and risk management - how much can they offload and when is the best time. By the end of the game they must hedge at least 80% of their holding. They can attempt a squeeze on the market by increasing their exposure (i.e. PR increasing their long position at the outset) before unwinding their view.

In terms of trading, they do not have access to the open market - the one created by the MM or by LT. They also cant talk to the HF. They have access to the pit via the LT and the mechanism is limit orders.

A limit order sets a size and level by which the LT can execute in the pit, the order is valid for a single trading session. The order is given on a bi-lateral basis between the PR/CO and their LT so is not known by anyone else. The LT must build a relationship with the PR/CO so that they feel that they are working for their advantage. It is up to the LT to decide when to execute and in what size - the LT doesnt have to complete the fill but at the end of the day they want to increase their reputation so are allowed to cross the order with themselves.

The limit order gives them the optionality to quicky cross the trade in a moving market and profit from any further move. This legging over is entirely illegal in normal markets but is a fun way to generate some tension. The LT can always hand over a better execution if his conscience dictates!

The PR can give upto 2 limit orders, say 10 at 180 and 20 at 185, but no more.

The PR and CO can contact the IB for immediate access to liquidity. The IB can make any price they like and in any size they want but should be a worse price than what is available by the MM. IF a PR or CO does ask for a price from an IB and they dont like the price, they can refuse. There is a lot of opportunity of messing around here which is what happens in reality, if a PR is using the IBs for price discovery and never trades, then the IBs can simply refuse further requests and the client is frozen out.

The size of the initial positions in each PR and CO should be material, say if we have 2 PR and 1 CO, I would put them at +100 position for each PR and -200 for the COs.