UBC-ESM

The UBC Election Stock Market
for the 1997 Canadian Federal Election
TRADER'S MANUAL


Directors:
Thomas Ross, Werner Antweiler

Governors:
Michael Goldberg
Dean of the Faculty of Commerce and Business Administration, University of British Columbia
David Bond
Vice-President and Chief Economist, Hong Kong Bank of Canada

Computing/Programming Services:
Werner Antweiler (PACIFIC)

Administrative office:
Faculty of Commerce and Business Administration
University of British Columbia,
Vancouver, B.C. V6T 1Z2
Tel: (604) 822-8614
Fax: (604) 822-8496
E-mail: esm@esm.ubc.ca

Opening Date/Time:
12:00 noon PDT, Monday April 28, 1997

Closing Date/Time:
23:45 PDT, Sunday June 1, 1997


Faculty of Commerce and Business Administration
University of British Columbia

April 28, 1997


The UBC-ESM is organized to permit the trading of contracts with payoffs based on the outcome of the 1997 Canadian Federal Election. Registered participants invest funds and trade contracts on a 24-hour, computerized market. All invested funds and cash deposits will be repaid to registered participants after the close of the market. The market is operated at UBC's Policy Analysis Computing & Information Facility In Commerce (PACIFIC) and can be reached exclusively on the World Wide Web at http://esm.ubc.ca/. Traders can connect to the market through the login menu located at http://esm.ubc.ca/CA97.


UBC-ESM
THE UBC ELECTION STOCK MARKET

The 1997 UBC Election Stock Market is a financial market in which the ultimate values of the contracts being traded are based on the outcome of the 1997 Canadian Federal election. Participants invest their own funds, buy and sell listed contracts, and bear the risk of losing money as well as earning profits.

The UBC-ESM is operated as a not-for-profit venture. As described in this manual, the method of issuing contracts and making final payoffs on these contracts ensures that the UBC-ESM does not realize financial profits or suffer losses. No commissions or transactions fees will be charged.

The exclusive purposes for conducting this market are teaching and research. Through the UBC-ESM, participants learn first-hand about the operation of a financial market and, because they have an added incentive to do so, they often become better informed about not only the current election but also the election process itself. As a research project, the UBC-ESM generates valuable data that will provide insights into market and trader behaviour. Participation in the UBC-ESM is open to all.


UBC-ESM
THE UBC ELECTION STOCK MARKET
TRADER'S MANUAL

Table of Contents

© Copyright, 1995, Ross, Brander and Forsythe; © Copyright, 1997, Ross, Antweiler; adapted, with permission, from IPSM - Iowa Political Stock Market Trader's Manual by R. Forsythe, F. Nelson, G. Neumann and J. Wright, copyright Forsythe, Nelson, Neumann and Wright. The section on Market Mechanics has been completely rewritten by Ross and Antweiler and appears as a separate document.


OVERVIEW

The UBC Election Stock Market (UBC-ESM) is an exchange in which traders buy and sell financial contracts representing political parties in real elections. This year the exchange opens at noon on Monday, April 28, 1997 and it now includes three markets related to the 1997 Canadian Federal Election. The principal market is the Seats Market in which six contracts are listed, one representing each major political party contesting the 1997 Canadian Federal election: the Liberal Party (CA97S.LIB), Bloc Quebecois (CA97S.BQ), Reform Party (CA97S.REF), New Democratic Party (CA97S.NDP), Progressive Conservatives (CA97S.PC); and a sixth representing "Other" parties and individuals contesting the election (CA97S.OT). For ease of exposition we shall hereafter refer to "Other" as a sixth party. The ultimate payoff from owning a contract for a party will be a liquidation value determined as $1.00 times that party's share of the seats in the Federal Parliament after the election. Contracts are initially placed in circulation through the purchase of blocks of contracts (Unit Portfolios) from the UBC-ESM. A unit portfolio consists of six contracts, one in each of the parties, and the cost of that portfolio is $1.00.

The second market is the Majority Government Market in which two contracts are traded, corresponding to a Liberal majority government (CA97M.LIB); and another contract representing all other outcomes (CA97M.OT) -- i.e. a Liberal minority government, a majority or minority government by any other party. Upon liquidation in this market, each contract in a party pays $1 or $0 depending upon whether that party won a majority. If the Liberals did not win an outright majority, each contract in CA97M.OT will pay $1. This could be due to the fact that some other party won a majority or to the fact that no party won a majority. As above, contracts are initially placed in circulation through the purchase of unit portfolios from the UBC-ESM. In this case, a unit portfolio consists of two contracts (one each of CA97M.LIB, CA97M.OT) and costs $1.

The third market is the Popular Vote Market in which six contracts are traded; as in the Seats Market there is one contract representing each major political party (i.e. CA97P.LIB, CA97P.BQ, CA97P.REF, CA97P.NDP, CA97P.PC -- the "CA97P." identifying these as contracts in the Popular Vote Market) and a sixth representing "Other" parties and individuals contesting the election (CA97P.OT). The ultimate payoff from owning a contract for a party in this market will be a liquidation value determined as $1.00 times that party's share of the provincial popular vote in the election. Again, contracts are initially placed in circulation through the purchase of blocks of contracts (Unit Portfolios) from the UBC-ESM. A unit portfolio in the Popular Vote Market consists of six contracts, one in each of the parties, and the cost of that portfolio is $1.00.

Participants invest in the market by making cash deposits with the Market Administrator. A trading account is opened in the trader's name and the amount invested is posted to the trader's cash account. The minimum deposit required to open an account is $5.00, and the maximum amount that may be invested is $1,000.00 per account. Upon entry to the market (and any time up to the closing of the market just prior to the election), a trader can purchase new unit portfolios from the UBC-ESM and then trade the individual contracts with other traders.

All receipts from market participants will be held on deposit by the University of British Columbia until the market closes on election day and liquidation values have been determined. At that time, liquidation values earned in all markets plus the balance in a trader's cash account will be paid to the trader. Any interest earned while the funds are held in deposit by the University will be used to help cover the costs of operating the market.

Trading takes place continuously from opening day until the market closes at midnight (Pacific time) on the evening before the election. The markets will be available during the midnight hours in order to carry out maintenance and backups. Current market prices in all three markets can be observed by anyone with access to the World Wide Web. The market history is determined during the maintenance period around midnight, and tables and diagrams are published under the "Yesterday's Prices & Charts" item on the UBC-ESM home page. Only registered participants can make orders and conduct transactions. This market has most of the features of a futures market. However, it does not allow short sales or margin purchases. Specifically, no trade can be undertaken unless the seller has possession of the contract to be sold and the buyer has a sufficient cash account deposit to cover the purchase.

The remainder of this manual is divided into two sections. The first section details trading rules and restrictions -- it shall be presumed that any participant in the market has read and understood the market specifications contained therein. The second section ("trading mechanics") serves as a reference manual for access to the computerized market. In this section, the procedures for logging into the market and executing transactions are described.

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TRADING RULES

This document describes the Seats Market which is the principal market in the 1997 UBC Election Stock Market. The other markets, the Majority Government Market and the Popular Vote Market, employ the same trading rules except for certain key features such as the definition of contracts, the determination of liquidation values and the composition of unit portfolios. The differences are detailed in the sections on contracts and payoffs.

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ENROLMENT, ACCOUNTS AND INVESTMENTS

Aspiring traders may enrol in the market at any time prior to the final close prior to the election by contacting the Market Administrator. New traders will be given an account in the UBC-ESM and assigned an account name and password. The minimum investment accepted is $5.00. Additional amounts may be invested at any time up to a maximum of $1,000.00 per account. All funds invested in the market will be credited to the trader's cash account and placed in a bank account at the University of British Columbia where they will be held until after the federal election. At that time payoffs to investors will be determined and all funds invested will be redistributed among registered traders as explained under Payoffs below. Funds in a trader's cash account can be applied to transactions in any of the three markets.

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CONTRACTS

In the seat market, contract liquidation values depend on the percentages of the popular votes garnered by the political parties in the 1997 Canadian Federal Election. Contracts can be thought of as shares in political parties. Each contract entitles the holder to a liquidation value determined by the share of seats won by that party in the election. For expositional convenience, "Others" will also be referred to as a political party. The "Other" contract will carry a liquidation value determined by the share of seats won by candidates not affiliated with any of the five other listed parties.

In the popular vote market, contract liquidation values depend on the percentages of the popular votes garnered by the political parties in the 1997 Canadian Federal Election. In this market each share in a party entitles the holder to receive $1.00 times the percentage of the seats share won nationwide by that party. The seats share percentages will be based on the results from the return of the writs after the elections. Because we want to close down the market and make payoffs in a timely fashion, it will not matter for the purposes of payoffs if later elections in ridings in which voting had to be postponed or court decisions on the admissibility of ballots in some ridings alter the seats share percentages.

The presence or absence of a majority position is a significant feature of the outcome in any Canadian federal or provincial election. For this reason, UBC-ESM is operating a third market (called the "majority government market") to gauge traders' perceptions about the likelihood of either of the two largest parties winning a majority. In this market each contract entitles the holder to a liquidation value of either $1 or $0. A contract will have a liquidation value of $1 if the party specified in that contract wins a majority (greater than but not equal to 50% of the seats) in the Federal Parliament. A single CA97M.OT contract will pay $1 if the Liberal Party does not win a majority. This could happen if another party wins a majority or if no party wins a majority.

Each contract is characterized by a unique symbol that consists of a market symbol and a stock symbol. The table below identifies the markets and contracts. For example, CA97S.LIB is a contract corresponding to the share of seats the Liberal Party wins in the election.

1997 Canadian Federal Election Stock Market
Market Market
Symbol
Stock
Symbol
Contract
Seats
Market
CA97S LIB the Liberal Party
BQ the Bloc Quebecois
REF the Reform Party
NDP the New Democratic Party
PC the Progressive Conservatives
OT Others
Popular
Vote
Market
CA97P LIB the Liberal Party
BQ the Bloc Quebecois
REF the Reform Party
NDP the New Democratic Party
PC the Progressive Conservatives
OT Others
Majority
Government
Market
CA97M LIB the Liberal Party wins a majority
OT any other outcome
Liquidation values will be based on results from the return of the writs after the elections. The writs are typically returned within about two weeks of the election. The results on this date are taken as final, even if they are in fact subsequently changed due to, for example, court challenges that result in some ballots being disallowed. If elections in some ridings are delayed for any reason (e.g. due to the death of a candidate) the liquidation values will be calculated based on the fraction of decided seats each party has won (according to the writs) when the writs are returned.

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UNIT PORTFOLIO PURCHASES AND LIQUIDATIONS

Upon entering the market (and any time thereafter until the market closes), a trader can convert funds in his or her cash account into unit portfolios. Each unit portfolio consists of a set of contracts, one of each type in the market. Thus, each unit portfolio in the Seats Market consists of six contracts; one for each of the six parties. The cost of each unit portfolio is $1.00. Likewise, unit portfolios consisting of one contract in each party may be redeemed at any time for $1.00, with the proceeds to be deposited in the trader's cash account. To purchase unit portfolios, select the "BUY" option and then choose contract "1$". Use the "SELL" option from the TRADING MENU, with "1$" as the contract name, to sell unit portfolios. Purchases will be charged to your cash account and sales will be credited to your cash account.

The purchase of unit portfolios results in the issuance of new contracts in the parties involved. Liquidation of unit portfolios has the effect of removing the contracts involved from circulation. Since each unit portfolio in the Seats Market consists of one contract in each party in the market, there will always be an equal number of contracts in each party in circulation at any time. Portfolios may also be purchased at market prices. In this case a portfolio consists of one contract of each party for which there are ask prices posted in the market. The cost of this portfolio is the sum of these ask prices. Notice that when there is an ask price posted for each party this portfolio consists of one contract of each party in the market, but that when there is not an ask price posted for a contract, that contract will not be part of the purchase. Likewise, portfolios may also be sold at market prices. This portfolio would consist of one contract of each party for which there are bid prices posted in the market and would sell at the sum of these bid prices.

Details on how to make these portfolio purchases and liquidations are given in the sections Purchase at market price and Sell at market price below.

Notice that the system ensures that the UBC-ESM does not realize financial profits or suffer losses from operating the market. The sum of the shares of Parliament seats across parties is necessarily one; thus, the sum of the liquidation values to be paid on all of the contracts in each $1.00 unit portfolio issued in the Seats Market will be $1.00. Units of contracts are entered into circulation only through the issuance of unit portfolios, and while subsequent trading may redistribute those contracts among market participants there will always be the same number of contracts outstanding in each candidate listed in a given market. The total of dividend payments made by the UBC-ESM will exactly equal $1.00 times the total number of unit portfolios purchased by all traders. The same is clearly true of the other two markets -- all the money invested by traders will be paid back out in the form of liquidation payments.

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PAYOFFS

The entire market will close at 23:45 (Pacific Time) on the evening before the election. As soon thereafter as official election returns are announced, liquidation values will be declared and all funds invested in the market will be redistributed among market participants. Distribution in this market will be determined as follows: for each contract in a party which a trader owns as of the close of the market, the trader will receive $1.00 times that party's share of the seats won in the Canadian Federal Parliament. Distributions to each trader will include the total of liquidation values on all contracts owned plus any amount which remains in his or her cash account.

Example:

  The 1993 Canadian Federal election led to the following distribution of seats in Parliament: Liberals - 60.0%, Bloc Quebecois - 18.6%, Reform - 17.6% NDP - 3.1%, Progressive Conservatives - 0.7%. If this result was exactly repeated in 1997, a contract in the LIB would pay a liquidation value, L(LIB), of
        L(LIB) = .600 x $1.00 = $0.600
Each BQ contract would pay:
        L(BQ) = .186 x $1.00 = $0.186
Each REF contract would pay:
        L(REF) = .176 x $1.00 = $0.176
Each NDP contract would pay:
        L(NDP) = .031 x $1.00 = $0.031
Each PC contract would pay:
        L(REF) = .007 x $1.00 = $0.007
And each OT contract would pay nothing
        L(OT) = .000 x $1.00 = $0.000
If Trader Jack Jones has $10.00 in his cash account and holds 30 LIB contracts, 20 BQ contracts and 10 REF contract when the market closes, the final disbursement to him will be $33.48: $10.00 + (30 x $.600) + (20 x $.186) + (10 x $.176) = $33.48 .

As explained under Unit Portfolio Purchases above, there always will be an equal number of contracts in each party, and the issue price for each unit portfolio consisting of one contract in each party is $1.00. The sum of liquidation values on a unit portfolio in any market will also be exactly $1.00. Thus, the total of all liquidation values paid on contracts in circulation after the election will exactly match the total issue price of those contracts. This payoff method guarantees that the UBC-ESM will not suffer financial losses or realize financial gains from market investments.

For all calculations and transactions, the accuracy is to 1/10 of a ¢ (equivalent to 1/1000 of a dollar). For example, a shareholder who owns 27 shares (in the public vote market) of a party which won 19.3 percent of the public vote will receive $5.211. The final payout, after all summations have been done with the aforementioned accuracy, is rounded to the nearest ¢.

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MARKET ACCESS

The UBC-ESM operates on the PACIFIC computer at UBC. Access to the market is, exclusively, through the World Wide Web.

After logging in, traders will be placed in the UBC-ESM and will be able to use their accounts to effect trades in the three UBC-ESM markets. Without registering separately with IEM, traders will not be able to participate (i.e. trade) in any of the other markets IEM is operating.

Entry into the market reveals information about current market prices and trading history for each of the contracts in a particular market. Trading of contracts in the market does require prior enrolment and assignment of an account. After entering a market, participants may log into their individual accounts to gain access to private information, including their current cash balance, contract holdings, outstanding orders, order history, and contract purchases and sales. From here, traders can exit from the market or initiate market activity.

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MARKET ACTIONS

The actions that can be undertaken by logged-in traders are placing a bid (an order to buy), placing an ask (an order to sell), withdrawing an outstanding bid or ask, making a purchase at the current market price, and executing a sale at the market price.

Placing a "Bid"

A bid is an order to buy in the form exemplified by "I bid 53.2¢ per contract for 4 contracts of LIB, and this bid is good for 3 days". That is, a bid specifies a party, a price, a number of contracts, and a time limit. Bid prices must fall in the range from 0.1¢ (one-tenth of a cent) to 100.0¢, and time limits must be expressed in full days between 0 and 99. A time limit of "0" days means that the bid is expired at midnight today, "1" means midnight tomorrow, and so on. The number of contracts in a bid is limited to the range 1-999. Note that the market system will take receipt of bids even if the total value of the bid (price times number of contracts) exceeds the trader's cash account balance. But, as explained below under Feasibility Checks, it will not allow trades to result from bids which would make the trader's cash account show a negative balance.

Note that bids should be thought of as "standing" or "limit" orders. They will not result in immediate trades unless some other trader has previously submitted an order to sell contracts in the same party at the same or a lower price. If not, the bid is placed in a queue to await acceptance by another trader.

Placing an "Ask"

An ask is an order to sell; an example is "I offer to sell 4 NDP contracts for 12.0¢ per contract and this order is good for 2 days". As with bids, an ask specifies a party, a price, a number of contracts, and a time limit. Ask prices must lie in the range 0.1¢ (one-tenth of a cent) to 100.0¢ and time limits must be between 0 and 99 days. The number of contracts in an ask must be between 1 and 999. The time limit must be expressed in full days between 0 and 99. A time limit of "0" days means that the bid is expired at midnight today, "1" means midnight tomorrow, and so on. Note that the market system will take receipt of asks even if the number of contracts offered exceeds the trader's portfolio holdings. But, as explained under Feasibility Checks below, it will not allow trades unless the seller owns the contracts he or she offers for sale.

Asks should be thought of as "standing" or "limit" orders. They will not result in immediate trades unless some other trader has previously submitted an order to buy contracts in the same party at the same or a higher price. If not, the ask is placed in a queue to await acceptance by another trader.

Withdrawing a bid or an ask (Withdrawing current order)

At any time a trader may request a list of his or her own outstanding bids and asks from the system. Any of these orders may be withdrawn. To withdraw an order, a trader goes to the OPEN ORDERS page where all open orders will be displayed in order of when they where entered. A simple click on the cancel button displayed to the right of each order will delete the order from the relevant queue. Note that outstanding orders cannot be revised by the trader, but those orders can be withdrawn and new orders submitted. Orders cannot be withdrawn after they have been accepted by another trader; any failure of an attempt to withdraw an order is likely due to acceptance of it by another trader before the order to withdraw reached the system.

Purchase at market price

A purchase order is an order to buy one or more contracts at an outstanding ask price; an example is "I offer to buy 4 BQ contracts at the current market price." Provided your cash account balance is large enough to cover the transaction, a purchase order will result in the immediate acquisition of one or more contracts. The price you pay is determined by the lowest price of any asks previously submitted by other traders. The number of contracts bought is constrained by the number in your order, the number available from other traders at the current low ask price, and, of course, by the balance in your cash account. This means of acquiring contracts is somewhat quicker, but less flexible and more transitory than the submission of a bid. You need not specify either a price or a time limit with a purchase order. But if the number of contracts you order to buy exceeds the number available at the current low ask price, the residual purchase order is simply cancelled; it does not remain in a queue for later acceptance by another trader.

As noted under Unit Portfolio Purchases And Liquidations there is one "special contract" you can purchase in the market: a unit portfolio consisting of one contract of each party in the market. You can purchase as many portfolios as you wish at this price if you enter "1$" as the name of the contract you wish to buy. The price of each unit portfolio is set to one dollar.

Sell at market price

A sell order is an order to sell one or more contracts at an outstanding bid price; an example is "I offer to sell 4 PC contracts at the current market price." Provided your portfolio includes the contracts you offer to sell, a sell order will result in the immediate sale of one or more contracts. The price you receive is determined by the highest price of any bids previously submitted by other traders. The number of contracts you sell is constrained by the number in your order, the number requested by other traders at the current high bid price, and, of course, by the number in your portfolio. This means of selling contracts is somewhat quicker, but less flexible and more transitory than the submission of an ask. You need not specify either a price or a time limit with a sell order. But if the number of contracts you offer to sell exceeds the number other traders are willing to buy at the current high bid price, the residual sell order is simply cancelled; it does not remain in a queue for later acceptance by another trader.

As noted under Unit Portfolio Purchases And Liquidations there is also a "special" contracts you can sell in the market: a unit portfolio consisting of one contract of each party in a market. If you enter "1$" as the name of the contract you wish to sell, the price of this unit portfolio will be set to one dollar and you can sell as many portfolios you wish at this price.

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BID AND ASK QUEUES

When bids and asks are submitted by traders they are placed by the system in "Bid Queues" and "Ask Queues", respectively. Each queue is ordered according to price and time of issuance; if two or more orders at the same price appear in a queue they are entered by time with older orders appearing ahead of newer orders (see illustration in the table below: look for the two top entries in the ASK queue). The prices displayed to traders when they log into the market are the highest bid price in the Bid Queue and the lowest ask price in the Ask Queue. If no price is displayed it is because the corresponding queue is empty. Orders remain in the queues until they are withdrawn by the trader who issued them, they expire, they are accepted by another trader and result in a trade, or they are removed by the system due to infeasibility. Expirations are determined according to the terms of the order. The other outcomes are explained below.

The table below illustrates a bid and ask queue for a particular contract, for example, the CA97S.LIB contract. The queues are ordered in descending order of their price so that the entries in the ask queue are usually above the entries in the bid queue. Where entries are on the same level, trades will occur. The "front" of the bid queue is therefore at its top, and the "front" of the ask queue is at its bottom.

Bid and Ask Queues for Contract CA97S.LIB
BID QUEUE ASK QUEUE
Entered Qty. Price Entered Qty. Price
    04/21 15:501060.0¢
04/20 09:20 560.0¢
04/21 12:231258.3¢
04/21 12:23 757.0¢
-- now -- 557.0¢ 04/21 17:11 357.0¢
04/19 11:481555.0¢    
04/18 12:231554.0¢
04/19 15:551054.0¢
04/10 22:155050.7¢
Note: this information is not available to traders.
It appears here for illustration purposes only.

In the table above, the bid entered "now" (e.g., a purchase request) is for 5 shares at a price of 57.0¢. Since it is at the front of the bid queue, and the ask price at the front of the ask queue is smaller than or equal to the bid price, a trade is feasible. However, the ask order is only for 3 shares. This means the ask order entered 04:21 17:11 is filled and removed from the ask queue. The "now" bid is reduced by 3 shares to 2. Now the queues are checked again for a feasible trade. Now the ask order entered at 04/21 12:23 has moved to the front and is feasible, as its price is again 57.0¢. Now the remaining two shares of the bid can be purchased, and the bid is removed from the queue. Finally, the ask order entered 04/21 12:23 is reduced to 5.

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EXECUTION OF TRADES

Trades are executed whenever a purchase or sell order is submitted, the bid price of a new order to buy meets or exceeds the lowest ask price in the Ask Queue, or the ask price of a new order to sell is less than or equal to the highest bid price in the Bid Queue. A complete description of the process resulting in a trade is as follows: whenever a new bid or ask moves to the front of a queue and passes the feasibility check, the system immediately checks for a possible trade. Specifically, if the highest bid price on a contract equals or exceeds the lowest ask price, then the system executes a trade between the bidder and asker. If the bid price and asking price are not identical, then the price used is the one from the older of the two orders. If the number contracts ordered in the bid and ask are not the same, then the number of contracts traded is the smaller of the two. The system handles all bookkeeping for such a trade -- the cash account of the bidder is reduced by the value of the trade (price x number of contracts), the cash account of the seller is increased by the value of the trade, and the contracts are moved from the portfolio of the seller to the portfolio of the buyer. Finally, the orders are checked for removal from the queues. If the number of contracts traded exhausts the number ordered in either the bid or the ask, that order is removed from its queue. Otherwise, the order is reduced by the number of contracts traded, and the modified order remains in the front of its queue.

The process resulting from the arrival of a purchase or sell order is similar except in the determination of the transaction price and in the fate of an unfilled order. When a purchase order is executed, the price used is the price of the lowest ask in the ask queue, and when a sell order is executed, the price used is the price of the highest bid in the bid queue. In both cases, if the order exceeds the number of contracts available at that price, the remainder of the order is cancelled without being placed in the respective queue.

Note that the system will not allow self trades. When the current high bid price meets or exceeds the current low ask, the system checks to see if the same trader submitted both orders. If so, the order involving the smaller quantity is cancelled, the order with the larger quantity is modified by reducing the quantity ordered a like amount, and an entry noting these changes is entered in the trader's history file.

It will sometimes appear that a trade that "should have" occurred did not. For example, you observe on the screen that LIB currently has an ask price of 53.0¢. You place an order to buy 3 contracts of LIB at 55.0¢. The system then informs you that your bid has been entered into the market but does not tell you that a trade occurred. This can happen for any of three reasons. The first is that your order was infeasible and was thus cancelled. The second is that someone beat you to it. Like most markets, there will be several participants and allocation is first-come, first-served. Computers are fast, but they cannot always change the screen information frequently enough to keep up with market. The third reason is that both the bid and ask were submitted by you and the orders were cancelled or modified because of the prohibition against self trades explained in the preceding paragraph.

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FEASIBILITY CHECKS

As noted above, infeasible orders (bids, asks, purchase orders and sell orders) may be submitted but can never result in trades. Each order is checked for feasibility when, and only when, it reaches the front of a queue, and no order can result in a trade before it reaches the front of its respective queue.

A feasibility check for a bid or purchase order amounts to a check of the prospective buyer's cash account as to whether or not there is enough money to pay for at least one contract. If buying even one contract would result in a negative balance, the bid will be stricken from the queue. A feasibility check for an ask or sell order involves checking the contract holdings of the prospective seller. If the trader owns none of the ordered contracts so that execution of the order would result in negative contract holdings, the order will be stricken from the queue. While a trade is being executed, feasibility checks are applied one contract at a time rather than to the full order. When an order fails the feasibility check and is stricken from its queue, an entry noting that action is placed in the trader's history file for later reference.

Example:
  The current high bid on the market for the LIB contract is 53.5¢, the low ask is 55.0¢, and trader Sam Jones has $10.80 in his cash account. Jones submits a bid to buy 30 LIB contracts at 54.0¢. Since this bid exceeds the previous high bid and Jones has sufficient cash to buy at least one contract, his bid passes the feasibility test and becomes the market high bid. Later that day, trader Jane Smith submits an ask, offering to sell 40 LIB contracts at 53.8¢. The system recognizes that this new ask is lower than the market high bid of 54.0¢ and thus executes a trade of twenty contracts between Smith and Jones. But after those 20 contracts have traded, Jones' cash account falls to $0.00 so the feasibility test on his remaining bid fails. Jones is allowed to buy the twenty contracts, but his remaining bid for ten more contracts is stricken from the queue and a note to that effect is placed in his trading history file. Smith's ask becomes the market low ask at 53.8¢ and the next highest bid of 53.5¢ is moved back to the front of the bid queue.

The UBC-ESM system will not let you sell contracts you do not own or buy contracts when you do not have the necessary funds in your cash account to cover the purchase. A check for feasibility is made when bids and asks are accepted and trades are about to be made. For this reason it is possible for an infeasible bid or ask to sit in the queue for some time until another trader tries to accept the offer. In such a case, any part of a transaction that can be completed will be. For example, suppose a trader places a bid for 20 contracts at a certain price but when her offer is about to be accepted by a seller (who wants to sell at least 20 contracts) she has only enough in her cash account to buy 10 contracts. In this case, 10 contracts will be traded at the quoted price and the rest of the bid canceled. If no part of the transaction is feasible (e.g. the seller has no contracts to sell), the trader trying to complete the transaction will receive an "Infeasible Trade" message and the infeasible bid or ask will be removed from the queue.

Feasibility checks are performed whenever an order is submitted (any bid, ask, buy, or sell, except unit portfolio purchases or sales, which are treated separately). A feasibility check is carried out in the following order, where each item listed below must be satisfied for the feasibility check to clear a trade:

  1. The current bid price is greater or equal to the current ask price.
  2. The bidder (buyer) and asker (seller) are different traders (disallow trades with self).
  3. The asker (seller) owns at least one share of the contract to be traded. The valid asking quantity is then determined as the minimum of what the asker owns and the number of shares the asker has requested to sell.
  4. The bidder (buyer) has at least sufficient cash to buy one share of the contract to be traded. The valid bidding quantity is then determined as the minimum number of shares that the bider can afford to buy and the bidder requested to purchase.
The quantity traded is then determined as the minimum of the valid asking quantity and the valid bidding quantity. By definition, for a trade to occur this has to be at least one share. Points 3 and 4 above make sure that this is the case. The price at which the trade occurs is determined as follows:
  1. When an (instantaneous) sell order is matched with a bid, the price is that of the sell order.
  2. When an (instantaneous) buy order is matched with an ask, the price is that of the buy order.
  3. Where a bid and ask order result in a feasible trade (such as when a bid is at a higher or equal price to the current ask, or when an ask is at a lower or equal price to the current bid), the price is that of the older order. This ensures that when you enter a bid at a higher price than the current ask, the trades that occur will be at the lowest feasible price for the buyer. Conversely, when you enter an ask at a price lower than the current bid, the trades that occur will be at the highest feasible price for the seller.

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ANONYMITY

All trading and all bids to buy and offers to sell are anonymous. The system will of course know the identity - more precisely the computer account - of each trader, the source of all bids and asks, the number and specifications of all bids and asks in the queues, and the portfolios of each trader. But, each trader will have only that information which applies to his or her own account. Public information about the market is restricted to current high bid, low ask and last trade prices, and summaries of prices and trading volumes over previous time periods.

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SECURITY

Because this market involves real cash transactions, security of the computer system is a major concern. Academic systems are, by design, less than ideal for maintaining strict security. Although many precautions have been taken in the design of the market system, a dedicated hacker may be able to penetrate the system. The surest defense against such activity is for traders to guard their account number and password closely. The UBC-ESM assumes no responsibility for unauthorized access to individual accounts. In the unlikely event that the system is corrupted, the market will be restored to its position as of the most recent time it is known to be uncorrupted.

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APPENDIX A -- GLOSSARY

Action
Anything that can happen to an outstanding bid or ask. Possible actions are: a sale, an expiry of an order, withdrawal of an order, cancellation of an order due to infeasibility.
Ask
An ask is an offer to sell a contract (technically referred to here as an "order to sell"). An ask will require specifying the contract name, the price, the number of contracts you wish to sell, and the number of days until the ask expires. For example you could "ask" for $0.35 per contract for 5 LIB contracts for 5 days.
Ask queue
The list of currently active asks. The system keeps them in order from lowest price to highest price. If there is more than one ask with the same ask price, these are listed from oldest to newest.
Bid
A bid is an offer to buy a contract (technically referred to here as an "order to buy"). To make a bid you have to specify the contract type, the price, the number of contracts you want, and the number of days until the bid expires.
Bid queue
The list of currently active bids. The system keeps them in order from highest bid price to lowest bid price. If there is more than one bid with the same price, these are listed from oldest to newest.
Closing Price
In most stock markets this refers to the last price a contract traded at prior to the market closing for the day. Since the UBC-ESM does not close until the election, there is no "closing price" in the normal sense until the election. However the term closing price is sometimes used in the UBC-ESM to refer to the last price a contract traded at before midnight.
Contract
The basic items that are being bought and sold in the market. In the UBC-ESM the available contracts in the Seats Market are indicated by CA97S.REF, CA97S.LIB, CA97S.NDP, CA97S.PC, CA97S.SC, CA97S.OT. In the Majority Government market the available contracts are indicated by CA97M.LIB, CA97M.OT. In the Popular Vote Market the available contracts are identified by CA97P.REF, CA97P.LIB, CA97P.NDP, CA97P.PC, CA97P.BQ, and CA97P.OT.
Feasibility constraints
You cannot sell contracts that you do not own. You cannot buy contracts that you do not have enough cash in your account to pay for.
Liquidation value
The dollar value paid out to the owner of a contract after the election. Each contract will have its own liquidation value depending on the results of the election and the terms of the contract.
Market
Where things are bought or sold. The UBC-ESM contains three markets: the Seats Market, the Majority Government Market, and the Popular Vote Market.
Market Administrator
The person who operates the market, sets up new accounts and administrates them, and is responsible for all technical duties from daily system backups to software maintenance. The market administrator is the only person allowed to inspect accounts and queues, and is charged with the safeguarding of the trader's anonymity.
Order
Either a bid or an ask.
Portfolio
A list of the contracts held and the cash balance for a trader. Each trader has his or her own portfolio.
Time Limit
The expiration date for an order, expressed in days from today. "0" means midnight today, "1" means midnight tomorrow, and so on.
Trade
The sale of one or more contracts.
Trader
Any registered participant in the UBC-ESM.
Transaction
The sale of one or more contracts. The same as a "trade".
Unit portfolio
A unit portfolio contains one unit of each contract that is traded in that market. Since there are two markets, there are two different unit portfolios. A unit portfolio can be either bought from the system, or sold back to the system, for $1.00 at any time when the market is open.

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