The next step is hard to perform well. If I knew how to predict the stock marker, I wouldn’t need the software business. For a player in our hypothetical stock swap market, an ability to predict stock trends is the core competency. If you excel at that core competency, you succeed. Otherwise, you fail. No successful player is going to reveal their stock market secrets so please don’t expect to find a winning investment strategy in this demonstration! Our four players predict the market by forecasting linear increases or decreases in stock price.  For each stock, a player predicts the stock price will rise or fall a certain percentage rate a month. In real life more complex functions would probably be used.

The demonstration doesn’t reveal any useful plan for predicting stocks. For the demonstration, the players pick random values of the increase or decrease! Some cynical observers have shown that random picking actually works better than the schemes most amateur investors adopt. So, perhaps we need not be ashamed of the incompetence of the price projection method.

In any case, the last section on this page shows the predictions that Player A makes for the demonstration

Market Estimate

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   AA = -0.4543006.4

  AIG = 0.2927006.4

  AXP = 0.1816006.4

   BA = 0.0337006.4

  BAC = 0.3662006.4

    C = 0.1642006.4

  CAT = 0.1235006.4

  CVX = 0.2505006.4

   DD = 0.4274006.4

  DIS = 0.4725006.4

   GE = 0.0915006.4

   GM = -0.3854006.4

   HD = -0.0286006.4

  HPQ = -0.0777006.4

  IBM = -0.1041006.4

INTC = -0.2254006.4

  JNJ = 0.2191006.4

  JPM = 0.1622006.4

   KO = -0.1285006.4

  MCD = 0.0152006.4

  MMM = 0.1575006.4

  MRK = -0.4224006.4

MSFT = 0.2043006.4

  PFE = 0.3470006.4

   PG = 0.3944006.4

    T = 0.3049006.4

  UTX = -0.3165006.4

   VZ = 0.0659006.4

  WMT = 0.4142006.4

  XOM = -0.4298006.4

Estimate is percent change per month for each stock

During the demonstration, Player A will ask to buy a stock swap. The broker will match an encrypted version of the “ask” with an encrypted “offer”. In real life, there may be no match. Perhaps nobody is interested in swapping the particular stock that Player A wants to swap. It is also possible that someone wants to swap but that potential seller expects a higher fee than Player A is willing to pay. Again, no deal is found. Neither case is very appealing for demonstration purposes.

To avoid an empty outcome, we’ve rigged this game. Among the four players there are only 3 independent stock price projections. Players C and D each have their own but Players A and B have modified versions of the same projection. The predictions of A and B are mirror images. In every case where A thinks a stock is going up, B thinks it is going down and vice versa. Because we have rigged the price predictions in this way, Player B is always going to agree on a swap with Player A. The two parties have opposite price predictions; consequently, any swap looks favorable to both parties. Although we have rigged the numbers for immediate success in the negotiation, the demonstration is a realistic enactment of a BEDM transaction.

Although we have told you how the game is rigged. nobody could prove the game is rigged. The predictions of both players are secure private information and inaccessible to examination, except in the demonstration.  (Yes, the ramifications of BEDM for the regulation of markets are not all good!)

The following exhibit shows the predictions for stock prices that Player A generates for this round of the BEDM negotiation over stock swaps. It is a boring pile of numbers, but in real trading houses, tables like this are the company’s treasure!

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