Bitcoin Forum

Based on my experience of 20+ years trading countless billions in the real world:

1. Sort your trading code out.

2. Invest in hardware or hosting, you're making thousands or tens of thousands per day. Buy or hire a room full of the best machines you can (I'm not a tech expert). You can never go down through 'excess trading demand' - this is amateur.

3. Create a minimum trading size, the tiny bot trades of $1 are swamping the system and add nothing.

4. Forget about circuit breakers or 'cooling off', this only works when assets are only traded on only one exchange (ie NYSE/Nasdaq) which is why you do not see gold or Forex stop trading. The market continues and your customers are left helpless.

5. Get someone to be a market-maker. You need a pool of money acting as market maker, to provide some depth of liquidity to stabilise the price when the market volumes become very illiquid or eratic. Confidence is everything in this market.

6. Prove you have some depth to your security. Right now people have millions invested in exchanges and any number of them could be complete shams designed to take coins that cannot be traced. I could setup a good looking exchange in days, collect coins and money and then disappear, it's been done before, it could be done again.

Thanks for the recent 24 hours though, I doubled my coins at no cost........

This would definitely be a good start...

Good points, but the ultimate solution is a decentralized exchange period. 

Trying to build on the wrong foundation is simply building a robust house on sand.  It's only a matter of time before its central point of attack is overwhelemend.

...decentralization is the only solution.

We are theorizing about developing a new decentralized p2p bitcoin exchange, or actually an exchange for any possible asset.
Could you please review this template and contribute with suggestions based on your experience in trading, or problems in the model we describe here?
My intention is to make a simplistic model of the futures exchange market that is in harmony with the bitcoin protocol.
https://github.com/p2p/bitcoin-exchange
https://bitcointalk.org/index.php?topic=172705.0

+1

Happy to do so.

However in order to understand if your proposal works you must first be clear about what specific separate issues this you are trying to overcome, that way you can test your theorums against those objectives.

I would imagine the issues include:

1 - Creating resilience against a DDOS/hacking attack.

2 - Creating a diversification away from a single operator dominated market.

3 - Being able to trade fast and with depth of liquidity.

4 - To create certainty of payment for both BTC and Fiat flows.

As a very quick reply, my answers would be:

1 - I'm not a techie, but I'd guess it's harder to DDOS multiple sites, but easier to hack the weakest link in the chain.

2 - This is already happening naturally, poor service means people leave to other sites.

3 - This will depend on how much depth each broker has and how quickly they can cross-trade.

4 - This is the big issue and it's even harder with lots of small operators.

What you must understand is that in most developed markets, such as gold/forex/oil whilst there are often many dozens of firms you can trade with, all of them are regulated, have substantial backing and the risks of failing is small (albeit that Lehman etc has somewhat changed that). Central exchanges exist for that purpose, thay are the people guaranteeing settlement.

The best thing for this market would be to have someone come is with real financial strength and credibility either into a new or existing exchange to provide certainty of settlement on transactions as well as being able to invest in a more enterprise-level infrastructure.

What is a market maker?

Hmmmm, all the brokers and exchanges close every weekend.

Thats correct.

The point being made if you re-read it though, is that no one broker closes whilst the others remain open i.e. there are no circuit-breakers or cooling off in the event of large market movements.

Everyone keeps talking about decentralized exchanges.  Sorry if this is a dum dum head question...but where will the dollars be stored?

I would argue that the problem with the current system is everyone is trying to make a trading platform.  This is NOT necessary.   There is no need for anyone to be trading this.  It should exist more like a money changer, that is all that is needed.   Leaving FAIT and Bitcoins in accounts just tempts people (exchanges CANNOT short bitcoin (they have NOTHING to deliver the buyer) UNLESS you all "deposit" your bitcoin with them and leave it there.
What is the purpose of these exchanges?   To encourage traders and daytraders so they can make money.   That is not productive in a limited float commodity.   Creating "financial" bitcoins is UNPRODUCTIVE to the bitcoin economy.   The only thing that is needed is a conduit for people with FIAT to quickly buy BITCOINS and people with BITCOINS to quickly exchange for FIAT.   Why does some "market maker" not do that?   They will someday but to do it you need to have a large inventory of FIAT and Bitcoins to start.   

Wow.. for once I'm in 100% agreement with proudhon ...    I ask myself that very same question every time I see "decentralized exchange" ...    Till someone comes up with a very good answer to this.. I'm completely discounting the whole decentralized exchange concept.

Sigg

In your pocket or bank account.  Not in MtGox's account.

Fiat money is never stored with the exchange.

• First bitcoins are sent to an M-of-N P2SH address.
• Cash in the mail or some such goes to the buyer.
• Buyer confirms with exchange that payment is legit.
  
• Exchange co-signs a second transaction sending bitcoins to an address of the sellers choosing.

The difficult part is that any of the convenient fiat money transfer systems are reversible and subject to fraud, except cash which is why localbitcoins.com actually works.

In the account of a regulated E-Money trader that guarantees (and is audited) to never do fractional reserve. Ripple gateways could be such entities for example.

Decentralized != anonymous or 100% P2P.

Cash can be counterfeited, BTC can't. ::) Also I don't know of even just a page where you can enter a serial number of a EUR or USD bill to check if it exists and which denomination it should have - you can NOT remotely check or guarantee that the 500 EUR bill someone wants to send you is legit or not. Once you got the bill there's no way for the buyer to guarantee that his bill was a real one and you did replace it with a fake one claiming to have been frauded and not the other way round.

There would need to be a custodian to handle and arrange settlement.

Yes we need to have someone performing the role of custodian or clearing house, but if one broker is very trustworthy that broker can have the role of custodian.

I'll add....

7. Provide easy mechanism for short positions (actual short positions, not simply staying in fiat).

8. Expand derivatives markets.

Is naked short selling really good?
It will only worsen the volatility of bitcoin.
Assume i would short sell 100 000 bitcoins i dont have at mt gox, the price would crash down to 10$ in a second with an average price of maybe 30$.
Some people would panic and sell their coins and drive the price even more down, i would buy back all coins with profit with an average of maybe 10$ and could also go long at those levels.

Agree. These suggestions are very logically put.
I still maintain distributed (or 'decentralized' as most are calling) is not necessary and will cause more problems than it solves.

We do not need to trade derivatives etc.   There needs to be places where you can change FIAT for BTC and vice versa.   Ever been to asia?  There are places on every corner that do this and in rome too.   That is all we need.   a trusted broker that has capital, you wire fiat, he sends your wallet btc and you never need to risk leaving your money with him,

No naked shorting......the BTC would be borrowed from a prime lender just as it would be during a normal short position in stock market.

Shorts & derivatives on any real scale are probably things that would require a mature market and only occur when/if there is more liquidity.....at this point we can barely handle long only positions. :)

Short selling reduces market volatility.

http://whitepapers.stern.nyu.edu/summaries/ch12.html

And regarding the circuit breaker....

Yes, probably not the best way to handle it. But I do think it is doable for BTC. CME halts gold, oil, & gas, etc., occasionally due to volatility. Forex does not have circuit breakers for obvious reasons....although I believe any particular marketplace within forex could halt trading.

http://www.firstenercastfinancial.com/news/story/43046-cme-halt
http://www.euroinvestor.com/news/2013/04/12/cme-group-goldaposs-slide-triggered-trading-pause-friday-morning/12289041

IMO it doesn't necessarily matter that there are multiple exchanges. ADRs are traded on multiple exchanges and continue on one exchange or the other during trading halts or when one market is closed.

12 hour circuit breakers are ridiculous. Short circuit breakers are not entirely out of the question. This would be less of an issue if we had a legitimate exchange.

Small transaction is not a problem by itself. The person with 0.0001 BTC should also be allowed to trade.
The problem is many transactions from the same origin in a short timespan.

If the small transaction from individual users were to be a problem due to amount of trades, they could just be collected into larger lots that are traded in one transaction. There could be one such transaction every x ticks(once a minute?), or whenever a whole slot of say 0.25 BTC is filled up .

One big thing distorting the Mt Gox recent bubble was the ability to game the averages by making a bid you had know way of backing up. I think this is a big recent for the recent attack. Per MtGox, their statement about changing this, starting Wednesday:


It must have been easy for the bad actors to inflate the price, under these conditions. Of course, if I'm missing something, that wouldn't be the first time.

If more than 5 transactions in a minute > display captcha = software DDOS solved
Physical ddos protecting router = hardware DDOS solved

How hard is it exactly?

There too much money to be made by manipulating the Bitcoin price with
DDoS that a single ddos protecting router is able to handle the issue completely.

Maybe the people that run the DDoS even want ransom to avoid DDoSing MtGox.

But there really isn't. How would a nefarious DDoS attack squad profit from completely destroying Bitcoin?

Everyone acts as if Bitcoin's success is a foregone conclusion, so a shadowy group would aim to DDoS attack (assuming that creates a panic....doubtful) so they could pick up cheap coins because they will definitely be worth much more in the future.

No, that is not a business model. There is no guarantee that they will ever be worth more in the future.

And at this point how would a DDoS even be successful in dropping the price now that everyone has been fooled into believing this DDoS nonsense? It's an excuse that, if believed, would boost the price because everyone would stop selling whenever we have a lag.

If anything, the lag prevents a sell-off. Is Bitcoin really so fragile that a temporary lag annihilates the currency? If so, that is even scarier than the supposed DDoS attacks.

The only entity that stands to benefit from lags are Mt Gox, IMO. The lag stems the sell-off, as I've posted ad nauseum. Having you believe this nonsense supports the price of bitcoins. The sell-off always starts prior to the lag. The system becomes unresponsive at key support levels and almost never breaks these levels (only during the crash). Tiny bot buys support the price fiercely and the price turns around.

Statements from Mt Gox would lead you to believe that the only time the price ever goes down is during is DDoS because Bitcoin simply doesn't go down.

I do like that you've at least come up with something creative.....ransom. Doubtful, but at least this makes more sense than the DDoS/panic nonsense that everyone seems to believe.

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

Well they're none in the UK any more when we used to have access to both Intersango and MtGox Barclay's.  Both were forced to shut for banking reasons.  Buying bitcoins in the UK is both expensive and difficult for smaller transactions or new buyers.

My solution for a decentralised exchange would be this: www.poundcoin.org

No  successful financial exchanges in the UK? What about the LSE?

Risk of failure of central node and need to eliminate escrow(trusted third party).

Decentralized trading is not possible with fiat currencies as they themselves are fully centralised.


Have a look at my proposal of decentralized trading between alternate crypto-coins.

https://bitcointalk.org/index.php?topic=112222

That's nonsense. In fact the forex market is one of the few professional financial markets that is distributed.
http://en.wikipedia.org/wiki/Forex

Every time I've had a problem with an exchange it was caused by the fiat side. Have a look at the bitcoin.de model: centralised BTC (basically an automated escrow service), fiat changes hands via free p2p SEPA transfers. We need more of these kinds of exchanges.

But govt. control monetary policies by sometimes manipulating forex price of their currencies as they have full control of minting money and its initial distribution.

The reason traditional financial exchanges don't have the problems that MtGox is having largely comes down to something everyone here hates, brokers. In the traditional model Joe Public does not talk directly to the exchange. He talks to a broker who talks to the exchange, or as it happens now, his computer talks to the broker's computer that talks to the exchange's computer through secure channels. There is no public exchange IP address to DDOS. (They would have a corporate site, but that just has corporate info and maybe some delayed quotes).

If MtGox followed this model the advantages would be several. They would be free to concentrate on their core business (matching orders). Their AML/KYC burden would be restricted to (say) ~1000 broker accounts total, not hundreds of thousands of new client accounts per year. They wouldn't have to pay for DDOS protection or deal with client scams and complaints. That's the brokers' job. Of course they would have to slash their fees to let the brokers eat, but their costs would also be much lower. Selling access rights to the brokers would be an new source of income.

The objection that everyone will have is "what do we need brokers for, they are just useless parasites". Well they are not useless: they are paid for being the exchange's meat shield.

Great insight, thanks for that.  How true, and what a load of cobblers the whole trading halt lark is.

Nice theory, but the brokers still need a public facing site with an IP address, which can then be DDOS'd.

The problem here is the exchanges have not spent the money they're making in developing adequately secure and resilient sites, it's that simple. The same would apply to a broker-led community. The difference is that a fragmented set of brokers would have less money to spend on security and resilience each than a good large single exchange like MTGOX.

MTGox can resolve this, they just need to throw some money at it.

Weak snark. Obviously they have, but to bring the market down they need to DDOS ~1000 broker sites. Good luck with that (one cliche deserves another). How much downtime i.e. unscheduled periods with zero trades does the NYSE or LSE have? how much Mt.Gox?

Great points!  Here is some input from CampBX:


1. Sort your trading code out.
- Our core trade engine code has been very reliable and error-free.  Since our launch in July 2011 we haven't found any bugs or mistakes in the code.  There are a lot of trade engines out there, but it comes down to error handling.  CampBX core engine is just 5-7% trading code, rest all is error handling, sanity checks, and cross-checks.
The peripheral code will always keep evolving as we need to add new features and scale at a fast clip.

2. Invest in hardware or hosting, you're making thousands or tens of thousands per day. Buy or hire a room full of the best machines you can (I'm not a tech expert). You can never go down through 'excess trading demand' - this is amateur.
- We have invested in dedicated servers housed in an on-shore, top-tier datacenter in Arizona. This data center has:
­    Triple telecom backbone connectivity for redundancy
    Caterpillar diesel generators in case of power brown-out / black-out
    Restricted physical access to servers
    24/7 monitoring


3. Create a minimum trading size, the tiny bot trades of $1 are swamping the system and add nothing.
- We have minimum size set at 0.01 BTC and the goal is to keep it around one dollar

4. Forget about circuit breakers or 'cooling off', this only works when assets are only traded on only one exchange (ie NYSE/Nasdaq) which is why you do not see gold or Forex stop trading. The market continues and your customers are left helpless.
- Forex trading platform has evolved through Billions of dollars of development expenses, while Bitcoin is a hobby project run by (mostly) volunteers.  Due to this reason Bitcoin code tends to choke under certain situations.  If I had to guess, cool-off will remain part of the game at least till Bitcoin 2.0 client comes out.


5. Get someone to be a market-maker. You need a pool of money acting as market maker, to provide some depth of liquidity to stabilise the price when the market volumes become very illiquid or eratic. Confidence is everything in this market.
- There are a lot of bots and independent traders working as market makers on multiple platforms and exchanges.  But there is a fundamental difference: Bitcoin transfers take 60 minutes to get 6 confirmations, which hinders the market-maker's ability to provide liquidity and increases risk significantly.


6. Prove you have some depth to your security. Right now people have millions invested in exchanges and any number of them could be complete shams designed to take coins that cannot be traced. I could setup a good looking exchange in days, collect coins and money and then disappear, it's been done before, it could be done again.
- CampBX has been audited by two independent penetration tests.  We continue to be audited nightly for new vulnerabilities and we are the first Bitcoin website to earn PCI compliance.  You can read more about it here:
https://campbx.com/faq.php#security-compliance


Do give us a try and spread the word if you like us!

Thank you,
    Keyur

I won't quote the full text (I hate it when people do!).

Thats a great reply, it's good to actually hear from an exchange. I cannot comment on your platform, but your answers suggest you are taking all these things seriously, so good luck!