Taiwan Political Exchange

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Frequently Asked Questions

  1. Q: How to start trading?
    A: After your account is activated, there are two ways to proceed. The first is to buy bundled futures contracts from Taiwan Political Exchange (TAIPEX) at a guaranteed price. The other is to buy futures contracts from other traders in TAIPEX. Either way, once you have contracts, you can start the fun of trading.

  2. Q: What is a bundle of futures contracts?
    A: Futures contracts in a bundle share a similar nature. For example, contracts of presidential election are grouped in one bundle and those of referendum are in another bundle.

  3. Q: How to interpret the price of a political futures contract?
    A: The price here translates to the percentage of ballots received by a candidate team in the election. So, for example, if the current price of a Lien-Soong futures contract is 40, it means the market conceives a 40% support rate of candidates Lien & Soong.

  4. Q: Why is the price of a bundle guaranteed?
    A: Since the values of the futures contracts in a bundle sum up to 100 by design, if you spend 100 to buy a bundle from us and never trade afterwards, upon maturity the liquidation values of all the contracts in the bundle in your account still sum up to 100. You lose nothing. (Nor do we.) In order to gain, however, you are encouraged to buy when you believe a futures contract is undervalued, and to sell when it is overvalued. However, you can also sell back us a bundle in order to gauge your cash flow.

  5. Q: Can I sell the bundles back?
    A: Yes, you can sell the bundles to us if you have a whole bundle of contracts.

  6. Q: Is there a transaction fee?
    A: No, all transactions are free of charge.

  7. Q: What is a margin?
    A: When you proceed to submit orders, buy bundles or transfer money between your accounts, the balance in your account must always be above the margin. We require a margin to avoid debts and you can cancel some of your bid orders to lower down the margin.

  8. Q: Does my account earn interests?
    A: No. Unlike deposits in banks, you do not earn interests from deposits in TAIPEX.

  9. Q: How is the price determined in trading?
    A: It is by an algorithm called continuous double auctions, which is the standard way in most financial exchanges. Outstanding ask orders are stored, in order of increasing limit, in a queue called orderbook. When a bid order is issued, it is checked with the lowest sale price in the orderbook of the asks. If the limit of the bid equals to or exceeds the lowest ask limit, a deal is to make. The lowest ask limit sets the trade price and the trade volume is determined by the requested bid volume and the offer volume. If the offer exhausts, it is removed from the orderbook. The process iterates until the ask queue becomes empty or until all the bid volume is fulfilled. Unfulfilled or remaining bid volume stays in the bid queue, awaiting forthcoming ask orders. When an order expires, it is removed from the orderbook.
    For a market bid order, since no price limit is set, deals are made with the outstanding orders in the ask queue, starting from the top (lowest limit) of the orderbook.
    In short, the process ensures that most favorable actions are taken on behalf of the bidder.
    Similar algorithm/principle applies to an ask order.

  10. Q: When I use a market order to buy (or sell), why isn't the bought (or sold) price the same as the on-screen 'market price' that I expected?
    A: The 'market price' on the screen is actually the last transaction price. If the market is thick enough (i.e. many participants online), the price by a market order is usually the last transaction price because transactions occur continuously. However, if the market is not thick enough, transactions go intermittently. In this case, buying (or selling) using a market order can result in a price much different from the last transaction price. It is thus suggested that one use limit orders when the market is thin.

  11. Q: How is the liquidation value of a futures contract determined?
    A: Since the contract price corresponds to the percentage of ballots the candidate team receives in the election, the liquidation value of a futures contract is calculated from the official numbers of cast ballots released by the Central Election Commission after the election. The values are rounded to nearest integers.

  12. Q: When is the liquidation taking place?
    A: Liquidation follows the official release of the election result after election.

  13. Q: How to activate my account?
    A: After registration online, an account is created. You can start to trade once you pass the email certification (One valid email address for one account.).

  14. Q: How to pass the email certification?
    A: After registration online, you shall receive an email containing your registration key. Please type in this key when you login into the system next time (One valid email address for one account.). If you do not receive your key after the registration, please check your junk or spam mail box.

  15. Q: Why is my order not carried out?
    A: Then please loosen your limit by raising the highest bid price or lowering the lowest ask price. This enhances the odds of matching between bid and ask. In early runs of TAIPEX when there are only few members, you may want to use 12- or 24-hour limit orders in order to meet more orders submitted by others.

  16. Q: Can I cancel my previous order which is waiting for matches in the orderbook?
    A: Yes, you can cancel it by submitting a new order. For example, you can cancel a pending DPP04 bid order by submitting a new (limit or market) order buying or selling DPP04 contracts.

  17. Q: Can I submit more than one orders?
    A: Yes. For example, you can submit an order on DPP04 contracts while having had a pending order on KMT04. Note that you cannot buy/sell contracts from/to yourself (see the above question). This prevents market prices from being set by single traders. Likewise, please do not doubly or multiply register. Trading among same individuals not only spoils the predictive power of the price, but also flaws the justness of the tournament. Our research results rely on the quality of the data. If the results turn out to be no better, it'll be difficult for us to secure funding for the project. System logs of the Web server record the IP # and time of a visit. Such information helps spot unduly acts. TAIPEX reserves the right to revoke the prize won by such a manipulator.

  18. Q: What is training session for?
    A: We set up the training session in order to train the new comers to become familiar with the trading in our system. Each participant should finish his training before he can trade the bundles beyond the training session. Please notice that since the account 0 is used to trade the bundles for training session, the balance in account 0 will not be considered for the final ranking.

  19. Q: How can I trade the bundles beyond the training session?
    A: As for now, you must register for at least 72 hours and also trade more than 500 dollars in the training session. The criteria may be updated according to the research requirements.

  20. Q: Why there are sub-accounts like sub-account 0, sub-account 1 and sub-account 3? what is the difference between them?
    A: We classify the bundles into different classes for research purpose. One can only trade a specific bundle with associated sub-account. For example, the sub-account 0 is responsible for the trading bundles of training session.

  21. Q: Can I transfer my money between my sub-accounts?
    A: Yes, but only the transfer between sub-account 1 and sub-account 2 is allowed.

  22. Q: Is there any cost for the transfer?
    A: As for now, it is free for transfer.

  23. Q: What is splitting?
    A: In designing an election bundle, we assume candidates A and B are running mates for a race. As time goes on, if the team, somehow, breaks up to become two teams AC and BD, we'll automatically replace any AB in your account with an AC and a BD. This splitting of AB preserves the benefits of both those who own AB's and those who don't own AB's, while the percentages of received votes still sum up to 100%.

  24. Q: What about privacy?
    A: Your privacy is protected by law. We perform a survey during registration. The result is shown in Statistics. No other account information will be disclosed.

  25. Q: How is a contract/bundle created?
    A: A committee of the TAIPEX board reviews and selects contract/bundle proposals. In general, contracts whose values are formed via continuous and collective effort/behavior are acceptable. Elections (presidential or parliamentary) are examples of this nature. We welcome any proposal. Please do not hesitate to share your ideas with the committee.

  26. Q: Is it legal?
    A: Yes. The dollars referred to at this site are fictitious. Since no real money is collected/exchanged, conformance to law is sure.

FAQ on Options

  1. Q: What is an option?
    A: An option grants its holder a right to buy or sell the underlying asset at a specified price, called strike price, on a specified date, called maturity. If it is a right to buy, the option is called a call option; if it is a right to sell, it is called a put option. An option holder is granted the right but s/he may choose not to exercise the right upon maturity.

  2. Q: What is an option on, say, Chen-Lu's price?
    A: Suppose you hold a call option on Chen-Lu's price whose strike price, X, is 36 and maturity on the coming Monday. If, on Monday, the price of a Chen-Lu, S, is 40, your call is then worthy of S - X = 4. Since it is positive, you choose to exercise the right, making a profit of 4 dollars. If, unfortunately, the price of a Chen-Lu drops below 36 on Monday, the call becomes worthless and it does no good to exercise it. In this case, you simply let it expire without exercising. The payoff of a call on Chen-Lu's price is therefore the greater of S - X and 0, or max(S - X, 0) in a shorthand. A holder of a call option therefore speculates that the price of the underlying futures contract will rise above the strike price when the option matures. On the other hand, the payoff of a put on Chen-Lu's price is max(X - S, 0). A holder of a put option thus speculates that the price of a Chen-Lu will fall below X upon maturity. A speculator or hedger can buy either call or put options for the purpose of arbitrage or hedge.

  3. Q: What are the positions in an option?
    A: If you speculate that the price of Chen-Lu will rise, you buy calls on Chen-Lu's price. If the price does rise above the strike price, the call's worth is positive. Your profit is the call's payoff minus its price at which you bought it. In this case, you, the winner, took a long position in the call. On the other side is the loser who sold you the call, having taken a short position. The amount of loss is exactly your profit. If the price of Chen-Lu does not soar above the strike, the call becomes worthless and your loss is the price that you paid for the call. On the opposite side is the winner who make the profit by selling you the call. Depending on different perspectives on price movements, one can take a long position in a call (or a put). The opposite takes the short position.

  4. Q: How to price an option on, say, Chen-Lu's price?
    A: Suppose today is Saturday and the current price of a Chen-Lu is 35. If you expect that, on Monday, there is a 60% chance of Chen-Lu rising up to 39, a 30% chance of Chen-Lu rising up to 37, and a 10% chance of Chen-Lu falling down to 34, then the price of a call on Chen-Lu's price with a strike price of 36 maturing on Monday will be: 0.6 × max(39-36,0) + 0.3 × max(37-36,0) + 0.1 × max(34-36,0) = 0.6 × 3 + 0.3 × 1 + 0.1 × 0 = 2.1 = 2 after rounding. This is the price that you deem fair to buy or sell such a call. A put can be similarly priced with the payoff max(S - X, 0) for a call in the above sum replaced by max(X - S, 0) for a put. In short, the price (or premium) of an option is the average payoff on maturity obtained by a weighted sum over possible price movements. It is clear that the option price depends on the strike price X, maturity, and your perception of the possible price movement distributions. (It depends also on the interest rate, which is zero in our setting.)

  5. Q: What's so special about options?
    A: Suppose, in the previous answer, the price of a share of Chen-Lu soars to 42 on Monday. The payoff of the call is then 42-36 = 6 dollars. The net gain is 6 minus the cost of the call which is 2 dollars (see above). The return of the trade is then (6-2)/2 = 200%. It is seen that options trading can yield huge profits or losses.

  6. Q: How to use options?
    A: Let's take an example of using put options. Suppose your portfolio consists of a Chen-Lu futures contract and a put on Chen-Lu's price. The put's strike price is 50 and maturity on Monday. If, on Monday, the price of a Chen-Lu is 52, although the put matures worthless, the portfolio is worth 52 because of the share of Chen-Lu. On the other hand, if the price of a Chen-Lu drops to 45, the payoff of the put gives you 5. Together with the 45 from the Chen-Lu, your portfolio is still worth 50. As a result, the worth of your portfolio is guaranteed to be no less than 50 dollars no matter what happens to Chen-Lu on Monday. The put therefore gives you an insurance. The cost of the insurance (premium) is what you paid for when buying the put.

  7. Q: What are the upper and lower bounds for an option price?
    A: It can be shown that a reasonable price of a call is bounded between max(S' - X, 0) and S', and that that of a put is between max(X - S', 0) and X, where S' is the current price of the futures. If the price is outside the range, an arbitrageur can set up a strategy to make a riskless profit.

  8. Q: How to trade options?
    A: Similar to futures trading, you submit either limit order or market order to buy or sell options online. TAIPEX receives and matches the orders according to your bid or ask price. For an option seller (writer), s/he receives the premium of the option (from an unknown buyer) once the sale order is met. The seller, however, bears a potential liability later when the option expires.

  9. Q: At what time of the day when an option matures?
    A: When you specify, say, Monday as the maturity day, it matures at 23:59:59 on Monday. At 23:59:59 of Monday, we calculate the option's value. If the option's payoff is positive, we automatically exercise it for you. Otherwise, it matures without being exercised. In other words, we take care of exercising for you. You don't have to issue any exercising command.

  10. Q: Why isn't my bidding/asking order matched?
    A: Check if the specs, such as the strike price, of your option appeal to others. There can be calls on Bush-Cheney's price with many different strike prices and different maturities. Suppose people bet on 5 different strike prices above the current market price of a Bush-Cheney. There are 7 maturity days in a week. There can thus be 5 × 7 = 35 different calls on Bush-Cheney's price. There can also be puts on Bush-Cheney's price. So there can be a total of 70 different options on Bush-Cheney's price! A sheer volume of participants are indeed needed to make the market liquid. We urge that you create options that interest others. We also petition that you invite as many of your friends to the game.

(last modified on Oct. 20, 2006)

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