Have just come back from playing 'Market Mayhem' - a floor-trading game held as part of Ensemble 2004 by FINAX (the finance society at XLRI). There is just one word to describe it - AWESOME! - had such great fun and learnt so much, I feel it should be used in every bschool. Some very interesting learnings....
Knowledge IS Power: The game involved trading of stocks and index futures using an open outcry system. The stock trading part was cumbersome and most stock holdings hardly gave returns due to low liquidity. However, one part most people in the game did not capitalize on was the huge potential gains from using index futures. Most of them thought index futures was some high funda thing and never bothered about it. By virtue of the fact that a couple of teams including mine had atleast basic knowledge of futures markets, we were able to make huge profits, without trading much. The gap between the index and the prevailing futures prices somehow was very huge - meaning that huge gains could be made out of an index arbitrage strategy.
Market inefficiencies do not last very long: The game involved 3 sessions. While we could make good profits in the first, we were unable to sustain this as slowly everybody started observing our behavior and imitating it so that index arbitrage became almost impossible. This, even in a market where we had 50 teams!
Demand and supply has higher effect on stock prices than do news: News clippings were periodically flashed on the screen. However, barring the initial time, the market totally ignored all news flashes, and price became determined by a few people. I believe this was because of the short time period involved (each session involved just one hour). In the short run, all price movement is hence demand and supply based.
Some other interesting observations:
1) Towards the close of the final trading session, market volatility increased heavily. Infact, it became so crazy, we stopped using futures trading altogether as we could no longer predict movement of the market. This is interesting because it comes very close to we see in real stock markets during panic - in this case, people who were losing tried all kinds of crazy buy-and-sell tactics - as everyone became desperate to increase their portfolio.
2) For the first time, I could see convergence of the futures price to the stock price - it was awesome seeing theoretical stuff in real life. At the final time, when markets became very volatile, you could see the futures price actually "chasing" the index. - really cool :D
Three cheers to FINAX for an awesome experience \:D/