Bitcoin Forum

What if Mt Gox, as an exchange, waited and waited for each good opportunity to buy bitcoins himself [Mark], at the lowest price he could, and sell them off through his own exchange each time, using the earnings to buy up more bitcoins at the cheapest price, thus acquiring 500,000 bitcoins in a very short period of time?

He would not have done anything wrong, really, legally, but his advantage as an exchange would be considered something of a "conflict of interest", yes? or No?

I'm pretty sure the 500,000 bitcoins that got hacked into and sold off through the exchange that early morning, were his. I never had much doubt about that. Originally I speculated that maybe the he was the hacker and tried to benefit from other people's coins, but now i'm thinking.....how would Mark have legally acquired 500,000 bitcoins? That's the only way I can think of? (If the 500,000 bitcoins were in fact his, which I believe they were)

Why would he have an advantage as an exchange? The guy running the exchange has no more information than we have, except maybe the black pool.

Other than that, making money by buying low and selling high is more or less what every speculator is trying to do, isn't it?

Well, if you were making a percentage of every trade, and say , on black friday, with 300,000 trades, you cleared approx. $40,000 roughly, and when prices dipped, or you created artificial selloffs and prices dipped, you used your profits to buy up everything you could, eventually in short time, you would a mass a large sum of bitcoins, right?

Being the exchange, I don't think you are supposed to use your own exchange for trading. That's some form of manipulation of the markets, right?

So... the 'Master Plan' is to... buy low... and sell high... -_-"   and accumulate your way to 500k coins

Well I wish I could master this plan too!

(the title is so misleading)

The money they earn with the trade is because of their work. It is exactly the same as the money you earn with you own work. This is paid by the users and is well accepted. You know, when signing on MtGox, that you give 0,65% of you trade as a fee.


How could they create artificial selloff? Every order is done by an user. The only thing that the owner could manipulate is to add fraundulently founds to his own balance. Let say that he add 10000$ without effectively sending those to the bank account. Then, indeed, he can do some transaction. Well, in that case, the money would have to be send anyway as soon as someone withdraw.

Thus, there is no real fraud.

Let say that MtGox owner create thousands of bitcoins to manipulate the market. This is a big risk because if there is a bank rush and everybody withdraw their bitcoins, they will not be able to pay.


How are they supposed to change their bitcoin for dollars then? They probably have lot of providers who don't accept bitcoin. And how would you enforce such a rule anyway?

Well consider if you were making a large profit daily, like say, $3000 ave. Okay?
That's with approx. 30,000 trades daily.

With that money you could afford to buy bitcoins daily at the best prices it reached each day. It's not a cheating thing to do, really, but isn't it a conflict of interest to do that in his own exchange?

In a very short time, he could have easily acquired the 500,000 bitcoins, but would it have been completely legal?

I'm just bringing this up, because he is hiding something in relation to the account that held 500,000 bitcoins, and if it's his, and it's held legally by him and he did nothing wrong, then why not reveal that it was theirs?

How is that different from anyone else making a legal profit of $3000, and using that to speculate on bitcoin trading?

Umm, no. It would be pretty boneheaded to trade on someone else's exchange if you owned your own exchange. Trading on your own exchange is one of the ways you help keep prices stable. If the price of a currency drops lower than it should be on your exchange (compared to other exchanges), you buy it up to protect the people selling on your exchange from being underpaid. If the price gets too high (compared to other exchanges), you sell currency to protect the people buying from your exchange for overpaying. This makes you money and benefits your exchange customers. It benefits the market generally by reducing volatility. It's win/win/win. It would be insane to discourage this or see it as "manipulation".

My thought from the start is that just one Exchange concentrating 90%+ of the trade of Bitcoins is not healthy. Its a risk for Bitcoin, no matter how honest the founders of the exchange. Sooner or later corruption would be unavoidable. This is history repeating itself for hundreds of years.

On the other hand, 2 or 3 big closed exchanges is not the solution either, they could become a cartel in the shadow.

Is there any technical way of doing a open source Exchange, with open records for everyone to see? This would be the only possible solution to avoid corruption and concentration of power.

A closed private fishy system dosent cut it.

This is my humble opinion, after weeks of pondering the matter.

here we go again....

Black pool is one advantage - but the bigger one is the current balances and also the time and dates of in and out transfers.

He also knows when money is coming into the site through deposits.  You see a lot coming in, you buy, then sell off at the top.  It's actually potentially really profitable.

I don't think it matters how concentrated the exchanges are. The fundamental problem is not exchange but banking. If Mt Gox only paired buyers with sellers and didn't hold anyone's money, the damage done would have been quite minimal.

And the irony is that you don't need anyone else to hold your bitcoins.

This is not a question of IF. It is obvious they can profit form information only they have. I am not saying they are using this information for personal gains right now, but hey, who could avoid the temptation in the long term?

Yeah and actually mtgox is a subsidary of the bilderberg group  ;D

We would hope they wouldn't, because it benefits everyone for them to do so. By acting on secret information, they make the market price reflect that secret information, effectively publicizing it.

It works the same way as insider trading. Say you know a company's stock is likely to dip. You sell that stock. This causes the price to dip, communicating to the market that the price is too high. This cushions the drop so it is more spread out rather than sudden, benefiting the market generally.

I think you dont know what you are talking about.  ;D

If you know the price of bitcoins will go down, you sell them. This makes the price of bitcoins go down sooner than it would have otherwise. It also means they won't go down as sharply. This reduces the volatility in the market and benefits everyone. You can sell against a slow drop to protect yourself. It's much harder against a sudden drop.

We *want* people to trade on any information they have as soon as humanly possible so the market can reflect that information. Hidden information is very bad for a market -- it means people are paying too much or getting too little.

So by your judgement, insider trading benefits the market generally! Ha ha...

Yes, it benefits the market generally. It may harm specific groups of people, particularly when it's a violation of a confidentiality agreement, but it benefits the market generally.

For example, when a CEO trades against his own stock based on inside information this hurts his stockholders, and he has a legal obligation to protect their interests. But it benefits the market generally by appropriately reducing the value of the stock as quickly as possible. (The CEO benefits, the market benefits, the stockholders suffer. The crux of the crime is that the CEO has betrayed his stockholders.)

If you believe otherwise, feel free to present an argument.

especially with the 1.3% Mt. Gox was putting on each trade during the entire operating weekend.

You know what the main problem with this Bitcoin forum is?

It is the number of paranoid fantasists that are attracted to it. I can't wait until more normal, rational folk get involved.

I couldn't care less whether an Mt.Gox associate, or Mt.Gox itself, had an account on the site.  I DO care if this was the compromised account. The have a clear conflict of interest in the decision to roll back all the associated trades when it's their money being lost.

For future reference, at what point will the theft of BTC, and subsequent sale, result in a rollback?  Is it a size threshold?  A market impact threshold?  Or simply a question of who owns the account?

You previously wrote "Hidden information is very bad for a market.". And I agree. So consider this: a quasi monopolical exchange that has access to information that the rest of the market has not, is in a position to use this information to gain profits from the use of this hidden information. This is in effect a continous transfer of wealth from the rest of the market to the controller of the exchange. This wealth transfer is not due to their useful work as an exchange (0.65% fee) but due to hidden information they only have access to. This hidden information does not benefit the rest of the market. Opennes of information would benefit the market as a whole, beacuse we would not have this transfer of wealth due to monopolization of information. This of course is only one of the drawbacks of this private closed monopolistic exchange.

You have to take into account that the natural tendency of a global market like this would be to have only one big exchange, as everybody wants to trade where the biggest market is. So this is a feedback loop that kills the small exchanges and feeds the biggest. This will in the end give too much power to the exchange and would endanger the original goal of bitcoin of being a descentralized and free currency.

As long as bitcoin is mainly a speculative commodity that depends on exchanges, this threat is very real. Once bitcoin (hopefully) becomes mainly a currency/money that you can buy most things with, exchanges would loose power as people would not need to exchange bitcoins for dollars or other currencies. But I dont see that the world will widely accept bitcoins for most goods and services soon, this cultural change will take years or decades. In the meantime, lets not allow exchanges accumulate too much power over bitcoin.

For now, exchanges are almost the only interface between bitcon and the real economy, this is too much responsability and power to be in the hands of one private closed quasi monopolistic exchange. We need to find a better solution than honours the vision of bitcoin as free descentralized currency.

(created by mistake)

This pretty much can't happen. If this did happen, I could open a competing exchange and charge a 0.1% fee. Their monopoly would evaporate rapidly, and I could take over that continuous transfer of wealth.

If they can get a better rate on a smaller exchange, why would they prefer the bigger one?

Why would a smaller Exchange be able to offer much smaller rates that a bigger one? There is a concept called economies of scale. Moreover if the bigger exchange makes profits from insider info and volume, there is even less chance a smaller one will be able to compete in rates.

And all else being equal, I would allways prefer being in a big exchange, because there are much more oportunities for supply to meet demand. Price wise and volume wise.

"This pretty much can't happen.". What do you mean? The quasi monopolistic situation? You must be kidding.

No, I mean the quasi-monopolistic situation where the exchange is profiting significantly from its own inside information. You can have a monopolistic situation if, for example, the exchange cuts their rates so low, operates so smoothly and reliably, and makes so little hidden money that there's no point in bothering to compete with them. But if they were making huge profits, the incentive to undercut them would likewise be huge. (Assuming no significant barriers to entry.)

The barriers of entry are indeed huge, beacuse everybody wants to be in the biggest market. You cannot suddenly bring everybody to the other market. Also when potential competitors make a cost benefit analisys they would probably not be able to take into account the profits for using hidden information. This is by definition hidden data.

Are you from the Chicago School of economics?

It wouldn't. That's why the hypothetical of the large exchange raking in dough on insider information is implausible. If the hypothetical were true, as I argued, a smaller exchange would be able to offer much lower rates.

No, not at all. The higher the profit margin, regardless of the source, the easier for people to enter the field.

If McDonald's was barely making money, you'd have a hard time competing with them. You'd have to be almost as efficient as they are just to break even. But if McDonald's was raking in the dough hand over fist, you could be profitable even if you couldn't match their economies of scale.

Right, but in the hypothetical, all else is not equal. In the hypothetical, the big exchange is drastically overcharging and raking in money hand over fist while the small exchange only needs to make a reasonable profit (though would prefer to make more if it could, of course).

I don't follow why people would want to be in the biggest market. If they're trading BTC for USD, they want to be in whatever market pays them the most USD for their BTC (or failing that, the lowest transaction cost), assuming it can accommodate their volume. You may not get the biggest trades at first.

You are saying the risk of these hidden profits is enough that we should design exchanges and policies based on it, otherwise this whole discussion is mental masturbation. Then you are saying we won't be able to know that they exist with enough certainty to risk money on it. You can't have it both ways.

Either the claim that there could be massive hidden profit can be supported by facts or it cannot. If it cannot, then why are we discussing it? Let's worry about aliens taking over bitcoins -- that also can't be supported by any facts.

I prototyped an exchange before abandoning the idea due to legal concerns.   My plan to 'compete' with Mt. Gox was to 'auto-magically' arbitrage between our two sites anytime the price difference was greater than Mt. Gox's fee.  I would charge a much lower fee to cause people to switch to my site, but make money on any price differences between the two sites.  This would give the new, 'smaller' site a larger 'volume potential' than Mt. Gox because it would represent the sum total of all of my customers plus all of Mt. Gox's. 

In a free market this kind of arbitrage is possible by any new entrant and would quickly undermine any even marginally profitable exchange.  Ultimately, all exchanges would end up performing this kind of brokering for their customers.

A standardized inter-exchange bid transfer system would help, but is not necessary.

Your saying insider trading benefits the market?
Now I know im at Disneyland.

Son, what you're saying completely make sense.... If Mt.Gox had a god damn TIME MACHINE!

Buy at the lowest, best price each day?? and sell them off? and buy again at another lowest price another day???
Are you serious? How do you know when are the price 'lowest'? The only advantage Mt.Gox have is black pool. That could be useful in speculating support and resistant, but certainly not enough to determine if 'now' is the 'lowest' point of the day. I think you have a gross misunderstanding about trading and equity market.

Mt.Gox being in Japan doesn't mean it can hire DORAEMON, you know.

I think you misunderstand where I was going with this.
I did not mean literally each day, at the lowest price. I just meant that with the profits, each day, buying some when they dipped down, and selling when they spiked, with any trading program, you could build up a nice supply of bitcoins in short time.

I´m sorry, but this whole thread is a bit pointless.
Either you assume that MtGox adheres to it´s policy of not being a counterparty(i.e. not participating in the market) or you assume that they are not honoring their word.

If you believe they decided to cheat/manipulate the market, following your strategy of buying low and selling high, would be a rather inefficient way of going about it. It would be far more easy and lucrative to simply run the whole exchange on a fractional reserve basis, especially given that they have full and unaudited control over entries in their database and a strong influence over how and when outgoing payments are executed.

So either MtGox is being true to it´s word(no buying for their own account), or they are cheating in which case following your ´Master Plan´ would be about the most inefficient way of going about it.

 

Don´t really see why you would thank me, I basically just called you(and this thread of yours) a troll, whilst trying to be polite about it.

I guess i'm thanking you for being polite, because i'm not a troll. I just needed someone to point out a few things. I'm trying to figure out why certain things are happening, that I don't understand.

Yes, I am saying that. The market benefits when all available knowledge is reflected in the prices. Insider trading allows the prices to reflect more of this knowledge. That is not, of course, to say that insider trading benefits everyone, but the market is not one of the victims. The victims of insider trading are generally the beneficiaries of the obligation that was violated (those who extended trust to the insider trader). The beneficiaries are the person who did the insider trade and the market generally. If you have an argument to the contrary, feel free to present it.

Well, all of the thread summarized - Did it possible that MG trade on his own exchange ? If so - did it matters ?

Yes, this is more what I was getting at.

Every time a Mt.Gox thread gets posted, a miner's video card explodes.

That can be the only explanation for this exponential flood of hysteria.

Someone posted this in another thread, and it summerises what I was trying to say, but lacked the ability to explain.

Nagle
Jr. Member
   
Re: MtGox won't "indulge" us with an answer to conflict of interest.
Today at 05:56:50 pm
   Reply with quote  #8
There are major conflict of interest issues with an exchange that itself is a trader.

A real exchange doesn't care what the price is. They just make money on transactions. There's no way they can lose big. The same is true of brokerages.  (Mt. Gox is both, because it holds customer funds.)

It's so tempting for brokerages to trade for their own account. Historically, this is a bad thing; many brokerages have collapsed doing that. It's also possible for brokerages to cheat their customers in many ways.

One is "front-running". A player who passes along orders can insert their own orders into the stream. All they have to do to make money consistently is to occasionally put in their own matching "buy" order when someone sends in a "sell" above the last price, and fill their own order first.  Conversely, they can put in a "sell" on a downtick. The edge from that information advantage is enough to insure profits in a volatile market.

Another is failing to segregate customer funds from the brokerage's own funds. Legitimate brokers are required to do this. (Banks are not, which is why banks are so heavily regulated.) If funds are segregated, and the brokerage goes bust, the customer's funds are still there. Failure to segregate funds usually means the broker is speculating with the customer's money.  Mt. Gox is opaque enough that we don't know if they're co-mingling funds.

This is why I strongly suggest not keeping funds with Bitcoin "exchanges". Move out all balances daily. Trade if you like, but don't use an exchange as a bank. They're acting as banks, or at least non-bank depository institutions, but they don't have the regulation or auditing required to hold the funds of others.

Right, but such an exchange will give its customers higher buy prices and lower sell prices than an exchange that doesn't do that. To remain competitive, it will have to charge lower commissions. There's no reason to expect it to be a net gain for the exchange.

This goes back to the interview about 3 nights ago -- when the live chat room asked him why the auditor had access to the live database -- rather than, presumably, just some after-the-fact reports.

The answer given by MtGox was that the auditor was auditing the buy and sell prices to make sure MtGox was giving accurate buy/sell prices -- which would, presumably, require access to the live database, but certainly not the password and email tables.  

While it would likely be true that they could see the tails of the order book that were not published that information is relatively useless.  If the market starts moving traders should have the opportunity to jump in front of existing orders by beating them by .001.

Information that MtGox had that could of been used to trade on is the ratio of dollars to bitcoins on the exchange as this would be a forward indicator of price movement through the tendency for the market to find an equalibrium. 

For example assume the following to be true:

Bitcoins are currently priced at 10usd = 1btc
The ratio of USD to BTC on deposit at MtGox is 1:1 (lets assume 500,000usd and 500,000btc)

Anyone with access to this information would have a huge advantage in trading as the price of usd to btc would likely move in correlation with this ratio.  If the ratio suddenly moved to 2:1 usd to btc you could almost be assured the price would of btc would go up (relative to the usd), the opposite would be true if the ratio moved to 1:2 usd to btc.  MtGox (or any exchange) would have a huge advantage as they would have access to this information days in advance depending on the methods of deposit used.  The size of the market for bitcoins is small enough that just a few deposits/withdrawals would be enough to greatly influence this ratio.  This is one of the reasons that either everyone should have access to this information or no one with access with this information should be allowed to participate in the exchange.  The latter would be really hard to stop.

The tails aren't important because it doesn't really matter if some is offer to sell 500btc at a billion a piece or buy 100,000btc at .0000001.

What does matter is the bitcoin and usd that is not "in action" on the orderbook, basically it is the money sitting on the sidelines.

My statements are made based on years and millions (billions possibly) in trades made on ECNs.  Not only do the tails not matter they can be used to send misinformation.  For example it was common to see the number of orders but not the amount offered or price on certain exchanges.  People would load the sell or buy side, whichever was the opposite of their desired position, in an attempt to influence the market. 

Trading curbs in the ETFs that I the majority of my trades were in made it so that it would be impossible for some offers to be matched.  I suppose this is a difference in bitching but I still contend that it is the total ratio of usd:btc on an exchange that matters, what you see on the order book would be incomplete and possibly misleading information.

Sry I am driving and typing....

Noone is forcing you to read this thread.

its easy to make money if u run an exchange with no regulation

http://en.wikipedia.org/wiki/Front_running