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created with NetLogo
view/download model file: market_with_insider.nlogo
The model that we have created tries to describe how insider traders can use privileged informations (that other people can't know) in a financial market. Particularly, we have assumed that, according to the information received, the insider traders try to sell all assets they have or buy an elevate number of assets. To specify, insider traders will sell all assets (at the price of 15, price that we have fixed) if the privileged information received reveals that assets are overestimated; at the contrary, insider traders will try to buy a lot of assets (at the price of 5, price that we have fixed) if the privileged information received reveals an underestimation of assets available in the market.
Initially, the turtles represent common operators. There are blue-turtles and red- turtles: blue-turtles represent people who can only buy assets; red-turtles, instead, represent people who can both buy and sell. After blue-turtles have bought an asset, they change color and become red; if red-turtles finish their provision of assets, they change color and become blue. After a transaction there can be also yellow-turtles: these turtles represent people without liquidity, so they can only sell assets. After a sale, they change color. All people have an initial endowment of 200 € and an individual evaluation of price of asset (number included between 1 and 19). A transaction happens if own-valuation is greater or equal to seller's evaluation and if the operator has sufficient money. The asset-price is determined by seller's evaluation: this means that buyers have an advantage because they can choose if buy or not.
We have introduced the possibility of change own evaluation. It can be increased or reduced: people increase own evaluation if it is lower than seller's evaluation and reduce own evaluation in the opposite case only if the difference between buyer's evaluation and seller's evaluation is greater than 3. Users can activate this possibilty through a switch on/off called "variability?".
We have also attributed a particular characteristic to the patches, called "new information" that is a number (included between 0 and 99). We assume that, if the number assigneed to a patch is 1, this represent the privileged information. The patches with the privileged information are green. When turtles start moving, first turtles that go on a patch with number equal to 1 become insider traders and start to use the privileged information to have advantages by the transactions. The color of turtles (insider traders) is fixed according to the strategy that will be realized. Insider traders' presence is activated through a switch on/off called "insider?".
If there are insider traders in the market, the transactions implemented between an insider trader and a common agent will be realized in a different modality. The price of the asset is always determined by the insider trader: if he sells, the asset price is equal to 15; if he buys, it is equal to 5. Only if the common agent is the buyer, he will change own evaluation according to the modality already seen.
The simulation starts by clicking the setup-button. When clicking the go-button the turtles start moving and trading. Go-button remains pressed.
To establish insider traders' strategy, before start the simulation, it is necessary to choose the price-of insider through the slider called "price-of-insider" (number included between 1 and 20). If user chooses a number lower (or equal) than 10, the turtles that represent insider traders are pink, and they will try to sell all assets; if user chooses a number greater than 10, the turtles that represent insider traders are sky, and they will try to buy a lot of assets.
During the simulation, the user can press more times the button "new information". This operation assigns a new number (included between 0 and 99) to the patches. The patches with number equal to 1 represent new privileged informations that can be used by turtles who will become other insider traders.
The simulation allows the users to monitor the total number of transactions effected; the number of transactions effected by insider traders and the price to which assets are sold with the help of three graphs and some counters.
Graphs are called "Number-transaction", "Asset-price" and "Transaction-of-insider".
The counters set in the interface allows to see:
- the number of turtles;
- the number of red turtles;
- the number of blue turtles;
- the number of yellow turtles;
- the number of pink turtles;
- the number of sky turtles;
- the number of insider traders;
- the number of transactions;
- the number of transactions effected by insider traders;
- the percentage of transactions effected by insiders on total transactions;
- the number of assets available in the market;
- the price to which assets are sold;
- the gain/loss of insider;
- the potential gain/loss of insider;
- the gain/loss of buyer;
- the gain/loss of seller.
With sliders, users can increase or decrease some parameters. In our model, there are four sliders:
- number, that allows to change the number of turtles (by a minimum of 10 turtles to a maximum of 300 turtles);
- price-of-insider, that is insider trader's evaluation (number included between 1 and 20);
- percentage-of-reduction, that allows to change the percentage of reduction of people's individual evaluation (by a minimum of 0 to a maximum of 20%);
- percentage-of-increase, that allows to change the percentage of increase of perople's individual evaluation (by a minimum of 0 to a maximum of 20%).
The last two sliders can be used if the switch "variability?" is on.
The variables to look at in the simulation are the total number of transactions, the number of transactions effected by the insider traders and the price to which assets are sold.
It's interesting to see how these variables change when users modify some parameters:
- number of turtles;
- price-of-insider;
- percentage-of-reduction;
- percentage-of-increase.
All these variables can be modified manipulating the correspondent sliders.
It's also interesting for users to see how the results change if people can modify own evaluation or not.
Users can try to change parameters described above, manipulating sliders and the switches set in the interface. Users also can modify some numbers fixed in the procedures:
- start-euros, that is the initial endowment of €;
- the maximum evaluation of asset;
- the difference between buyer's evaluation and seller's evaluation;
- prices of insider traders' bargainings.
In this model we have determined, for bargainigs between common operators, the asset-price as seller's evaluation. In alternative, asset-price can be determined as the average of buyer's evaluation and seller's evaluation.
Users can also plan another way to define the strategy used by insider traders and how insiders can obtain an advantage by the informations that have received.
Netlogo model: "economicexchange", by Rinke Hoekstra, January 2005
http://www.ccl.sesp.northwestern.edu/netlogo/models/community/
This is the website for the NetLogo community models.
Nicodano G., "Information and market of capitals", typescript, 1996