Jesse Divnich will be providing analysis of the video game industry on the simExchange. Jesse has been working in the Video Game Industry for over 10 years. During that time he has assumed many professional roles including; beta tester, programmer, publisher analyst. For the last 6 years, Jesse has served as a private consultant and analyst for buy-side investment firms.

Jesse has received many awards for his work in the private investment sector as an analyst covering publicly traded video game companies. Currently, Jesse has switched from the private sector to the public sector as an Analyst for The simExchange.com where he writes analytical articles on various industry topics. You will find his articles in the new Research section.

The simExchange now features a new Research section. This section is dedicated for industry observers who may be using the simExchange web site entirely for the purpose of data gathering and analysis. In this section, we will represent the simExchange trading data in ways that can provide insight on trends in the industry. We will also be offering analysis that applies the simExchange data to what is happening in the video game industry.

As part of this new change, the navigation bar at the top of the web site has been rearranged. In place of the rankings tab, there is now a research tab. The rankings pages have been rolled into the Community section.

Since the launch of the simExchange, stocks and futures contracts have debuted at a price suggested by the submitter of the game with some adjustment by the admins of the simExchange. This price was generally too high or too low, resulting in sharp price moves following the IPO and windfall profits. This is expected as the forecast of an individual inefficiently aggregates information compared against a market. Although many traders have come to expect windfall profits from an IPO (possibly from the irrational exuberance of the 90s tech bubble), this is not how an IPO is supposed to work.

To remedy this problem, the simExchange began the use of an experimental new IPO process to determine the IPO price. We evaluated many IPO processes such as Dutch auctions and Parimutuel Auctions but decided on a Double Call Auction to keep the process simple. A double call auction is how trading on the simExchange has always functioned. The only difference from standard trading is that the automated market maker is turned off.

Price discovery works through traders submitting buy orders at the maximum price they are willing to buy at and submitting sell orders at the minimum price they are willing to sell at. Essentially, traders are posting a range of how well they think the game will sell—a maximum and a minimum.

For a single trader, this range may be very large. They may think a game will sell a minimum of 400,000 copies (40 DKP) and a maximum of 600,000 copies (60 DKP). This would equate to a buy order at 40 DKP and a sell order at 60 DKP. With this player’s orders alone, the bid-ask spread is a very large 20 DKP.

However, a second trader may believe the game will sell at least 500,000 copies (50 DKP) and at most 650,000 copies (65 DKP). The trader’s orders represents a 15 DKP bid-ask spread, but together with the other trader, the best bid is now 50 DKP and the best ask is now 60 DKP. The bid-ask spread is now 10 DKP.

A third trader believes the game may only sell 300,000 copies (30 DKP) with a max of 550,000 copies (55 DKP). The bid-ask spread is now 5 DKP. The order book would look like this:

As more traders submit orders, the bid-ask spread will tighten and converge on a market price. Individually, no one knows what the IPO price should be, but together, traders can narrow the range down substantially. This price range should be the best guess of a fair IPO price as this is where the buyers and sellers meet (the optimists and pessimists for the game’s potential sales). In this IPO process, trades only occur when traders are willing to buy and sell at the same price. Once again, this is no different from normal trading except there is no automated market maker submitting orders.

However, this process has proven to be difficult to understand for many members of the simExchange, especially those who use the Basic Trading mode, which is limited to placing market orders (orders that immediately take the best available price). If a trader is not used to looking at what is the current selling price, he may be in for a surprise when his buy order fills.

Originally we had considered reserving the IPO process only to those using the Advanced Trading interface so that traders are forced to identify the matching price they would accept. However, we thought traders using the Basic Mode should still be allowed to participate if they see a price they think is good for buying or selling. Of course, this assumes the trader using the Basic Trading mode is paying attention to the current bid and ask prices. However, many traders using the Basic Trading mode ended up with prices they were not happy with.

Last night, we have heard a deep debate regarding the IPO process. Our goal is to make accurate forecasts in an entertaining and easy to play process. It appears the experimental IPO process has failed to accomplish those goals for many traders.

Based on user suggestions, we will combine the experimental process with elements of the original IPO process into a 2-step IPO process. Once a stock or future is listed on the simExchange, there will be a stage to determine the IPO price. This will be a three-day period in which players place orders in a double call auction. To participate in the double call auction, the player must specify the maximum price he will buy at or the minimum price he will sell at. After the three-day period, an IPO price will be calculated. At this point, the second stage will occur with the stock or future available for purchase or shorting at the IPO price all day by all traders. Following this day, regular trading with automated market maker will commence.

Please post discussion on this issue here rather than the general forum. Remember, this is an experimental process in determining the best way to IPO a contract on a prediction market.

IPOs for July futures will follow the experimental process used for console futures last week. All futures will debut without automated market maker for three days to determine the market price. All starting prices are simply suggested IPO prices. All futures IPOs will begin at 12:10 AM PDT like usual. The following is the IPO schedule for July game futures contracts:

July 25, Wednesday: Take Two's All Pro Football 2K8 (PS3) and All Pro Football 2K8 (Xbox 360).

July 26, Thursday: Electronic Arts's NCAA Football 08 (PS3) and NCAA Football 08 (Xbox 360).

July 27, Friday: Nintendo's Mario Strikers Charged (Wii) and Tecmo's Ninja Gaiden Sigma (PS3).

July 28, Saturday: Activision's Guitar Hero: Rock the 80s (PS2) and Nintendo's Wii Play (Wii).

July 29, Sunday: Nintendo's Mario Party 8 (Wii) and Pokemon Diamond/Pearl (DS).

This is the fourth month the simExchange video game prediction market has traded contracts on the NPD Group's monthly sales data. This month, the simExchange expanded its contract offerings to include 10 software SKUs.

PS3 sales came in line with market expectations at 98,500 units. The simExchange market expected 98,400 units to be sold in the month of June. Sales of Nintendo DS, Sony's PSP, and Microsoft's Xbox 360 exceeded the market's expectations while Nintendo's Wii underperformed expectations. Traders likely expected a larger supply of Wii units to be shipped into the US than Nintendo was capable. The PSP's price cut proved to be a stronger catalyst for sales than the market anticipated.

The PS3 results were the least surprising to the market (off -0.1%), while the Wii results were the most surprising to the market (off +13.62%). The PS3 futures contract was the most heavily traded futures contract on the simExchange with a total volume of 2,511,424 contracts traded. The Wii futures contract was traded for a total volume of 790,629 contracts.

Mario Party 8 lead the pack of software SKUs tracked by the simExchange, beating expectations. Microsoft's Forza Motorsport 2 came in second, inline with expectations. Electronic Arts' Harry Potter and the Order of The Phoenix significantly underperformed market expectations.

The following tables compare market expectations on the simExchange and actual results as reported by the NPD Group. Expectations by leading analyst Michael Pachter of Wedbush Morgan are also presented for comparison purposes.

US Hardware tracked by the simExchange in June 2007

US Software tracked by the simExchange in June 2007
(Not the Top 10 software SKUs of June 2007)

How exactly does this work?

Gamers and developers sign up on the simExchange for a free trading account. Using virtual currency called DKP, players buy virtual futures contracts that are under-predicting sales and short sell futures that are over-predicting sales. This concept is widely known as "the Wisdom of the Crowd" and this system is known as a "prediction market."

About the predictions

Predictions on the simExchange should become more accurate over time as (1) the diversity of the pool of traders increases and as (2) more accurate players are rewarded with more virtual currency for their accuracy (thereby enabling them to form more predictions) and less accurate players lose virtual currency (thereby discounting their ability to form more predictions). Check out the simExchange's results in May, April, and March.

Copyright and reprinting

The simExchange, LLC retains the right to the content of this article but permits the reprinting of this article with proper credit to the simExchange. Sales data published here includes data disclosed with permission by the NPD Group exclusively for the purpose of settling futures contracts on the simExchange.

* NPD Group sales data
** The simExchange trading data
*** Gamasutra, July 16, 2007

The simExchange is continuing its consolidation of stocks listed for trading. The following stocks are candidates for delisting. These stocks were chosen for delisting due to inactivity in the stock and the price maintaining an equilibrium level for an extended period of time.

All shares will cash out at the last traded price. This price is determined as the fair value as the market has not viewed the price as undervalued or overvalued for some time. These stocks will no longer appear when browsing the genres and platforms pages. You will still be able to view the stocks' pages by searching for the games.

If you feel any of the following should not be delisted, please make a case and post in this forum:

Battlefield 2142 (PC)
Call of Duty 3 (PS2)
Call of Duty 3 (PS3)
Call of Duty 3 (Wii)
Call of Duty 3 (Xbox)
Call of Duty 3 (Xbox 360)
Call of Duty: Roads to Victory (PSP)
Castlevania: Portrait of Ruin (DS)
Crackdown (Xbox 360)
Def Jam: Icon (Xbox 360)
Diddy Kong Racing DS (DS)
FEAR (Xbox 360)
Final Fantasy III (DS)
Final Fantasy VI Advance (DS)
The Godfather: The Don's Edition (PS3)
The Godfather: Blackhand Edition (Wii)
Hotel Dusk: Room 215 (DS)
Lost in Blue 2 (DS)
Lost Planet: Extreme Condition (Xbox 360)
Madden NFL '07 (Xbox 360)
NBA Street: Homecourt (Xbox 360)
NBA Street: Homecourt (PS3)
Need for Speed Carbon Own the City (PSP)
Neverwinter Nights 2 (PC)
Phoenix Wright: Ace Attorney - Justice for All (DS)
Red Steel (Wii)
Sonic and the Secret Rings (Wii)
SSX Blur (Wii)
Tiger Woods PGA Tour 07 (Wii)
Tony Hawk's Project 8 (PS3)
Tony Hawk's Project 8 (Xbox 360)
Wario Master of Disguise (DS)
Virtua Fighter 5 (PS3)
Virtua Fighter 5 (Xbox 360)

The following is the IPO schedule for the week of July 3. The summaries for these stock listings are entirely user submitted with no editorial review. If the information is inaccurate, please suggest changes in the Wiki.

IPOs for this week will follow the experimental process used for console futures last week. All stocks will debut without automated market maker for three days to determine the market price. All starting prices are simply suggested IPO prices by the games submitter. All stock IPOs will begin at 12:10 AM PDT like usual.

July 23, Monday: Take Two's All Pro Football 2K8 (PS3) and All Pro Football 2K8 (Xbox 360). The listings were submitted by Joe80.

July 24, Tuesday: Activision's Guitar Hero: Rock the 80s (PS2). The listings were submitted by Barfo.

July 25, Wednesday: Midway's Stranglehold (PS3) and Stranglehold (Xbox 360). The listings were submitted by wilson576 and SpikeDelight.

July 26, Thursday: Nintendo's Brain Age 2 (DS). The listing was submitted by Bungalow_Bob.

July 27, Friday: Electronic Arts's Madden NFL 08 (Wii), Madden NFL 08 (PS3), and Madden NFL 08 (Xbox 360). The listings were submitted by Joe80, cerdsmania, and argon.

July 28, Saturday:Electronic Arts's Tiger Woods PGA Tour 08 (Wii), Tiger Woods PGA Tour 08 (PS3), and Tiger Woods PGA Tour 08 (Xbox 360). The listings were submitted by feelmyring.

Due to interest in longer IPO periods, the IPO period for the July futures contracts has been extended to 3 days. In this period, the automated market maker is turned off and the price of the future is determined entirely by what traders are willing to bid. After 3 days, the automated market maker will be activated to provide constant liquidity.

We will be launching the July futures contracts for the PlayStation 3, Wii, and Xbox 360 tomorrow. We are going to experiment with a new way to conduct IPOs. Rather than setting the IPO at a price determined by the exchange (which is often wrong), we will allow the market to decide where the contracts should begin trading. So instead of the market makers providing unlimited contracts at one price, there will be no market maker at all. All trading will be between human players.

Futures contracts for the handheld consoles, Nintendo DS and PSP, will debut on Friday July 20, 2007.

IPOs will begin at 1PM Eastern / 10AM Pacific.

To coincide with the delay of NPD's June video game sales data release, expiration of June futures will be delayed until 11:30 PM PDT on Sunday July 22, 2007.