Coud bitcoin exchanges use a circuit breaker?

[Nova!]

I am considering the idea of implementing a circuit breaker for bitcoin exchanges to use and I would like some feedback on the idea.

For those who don't know what a circuit breaker is, it's a tool that markets use to prevent the type of runs on bitcoin we have been seeing lately.
Prices being driven up by (supposedly) natural market forces, and then pushed back down again by nothing more than DDOS attacks and panic buy/sells. 
It's abuse of the system, and it's going to kill the confidence of people who would like to use bitcoins for general commerce reasons.
As we all are well aware it is the people who have confidence in bitcoin that give bitcoin (or any currency) it's value.

In a nutshell what a circuit breaker does, is cease trading and cancel orders that occurred during a panic period.
For instance if the price drops 20% in a day, a circuit breaker would kick in and cancel all sell orders for time called a "quiet period". 
Traditionally this has been held to mean "until end of day".

Note that this would not prevent access to the market, nor would it inhibit the ability to move bitcoins in or out of the market. 
What it would do is give folks a cooling off period so they don't crash the price.  Think of it like a parachute for the market to give it time to recover.

Once the cooling off period is over, then trading resumes, however orders are filled under a specific quota of orders per hour as a function of trading volume. 
This artificially lowers trading volumes for a time and forces prices to stabilize by literally slowing things down and giving folks time to breathe.
All orders above quota are placed into a pool to give those who made the order time to either cancel the order on their own, move their coins to a different exchange for more immediate execution, or decide that they can wait a bit for the system to normalize.

The final piece of the circuit breaker is a graduated return to normal system. 
As time passes the quota gets bigger eventually becoming 100% again.

Let's look at how this would work in practice.

10 AM Bitcoins are trading at $100 (Daily volume 10,000 trades)
10:30 AM Price drops to $80 because of a panic sell. A circuit breaker signal is thrown, all trading is halted for half an hour.

During this 30 minute period...
 
All executed trades for the last 30 minutes (or precipitous drop period) are cancelled and unwound because they caused the price to shift too far down, balances are restored to normal.
All market sell orders are cancelled.
All limit buy orders below the last acceptable strike price are cancelled.
 
All users of the system are notified of what is going on by preferred contact method, email, SMS whatever and advised that if they had an order pending they can place it again when the cooling off period is over.

11:30 AM Trading resumes, at 10% rate,  (10,000 *0.1 / 24), only 42 trades are allowed to execute.
12:30 AM Trading window is now 20% or 84 trades
01:30 PM Trading window is now 30% or 125 trades
02:30 PM Trading window is now 40% or 166 trades
03:30 PM Trading window is now 50% or 208 trades
...
10:30 PM Normal trading resumes.

Let me know what you think of this idea.  I think for it to be most effective it would need to be adopted by more than 1 exchange, but each of course could implement their own thresholds.  Failing that it would cause some interesting arbitrage opportunities.  The purpose of the system being not to buoy prices or artificially inflate values, but to give time for the market to breath and cooler heads to prevail so that panic selling can't rob people who are using bitcoins for daily commerce. 

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[mojod]

+1

trading curbs were implemented on NYSE in response to black monday '87

I like the idea of cutting the fat during the break.

[Xenland]

isn't the banks being closed on weekends a circuit breaker enough? hehe, oh wait no i didn't think that through if you have money in an exachange you can just keep trading back and forth but still. Okay i see your point it could be helpful if aware of the "natural" breakers like bank weekends.

[Nova!]

isn't the banks being closed on weekends a circuit breaker enough? hehe, oh wait no i didn't think that through if you have money in an exachange you can just keep trading back and forth but still. Okay i see your point it could be helpful if aware of the "natural" breakers like bank weekends.

Well besides the fact that due to the internet, banks are never closed, just the branches. There is also the fact that the earth is spinning so different parts of the world are always on different days.  Also many countries don't necessarily use the Gregorian calendar and thus it may be a wholly different day.  Finally there are many banks that could care less about the weekend and stay open anyways. 

Furthermore, yes there is the trading back and forth that occurs, someone has to make the market after all.  Some folks will make big plays, but many of us are content to make several small profits each hour if it helps to stabilize the currency.  (How many people are still running some version or another of my VWAP trader, show of hands please).

But primarily the circuit breaker acts as a stop to prevent sheeple from crashing the price in a stampede because they think that the current drop in exchange price is due to a natural event, or that the sky is falling or whatever.

Market fact, nothing of real value loses 20% of it's value overnight.  A precipitous rise or drop is almost always the result of unnatural price manipulations.
The fact that there is a market for a thing indicates that the thing has value to someone, and the job of the market is to help discover the true price.  This is hard to do when people are actively screwing around with the market in an attempt to make a quick buck at the expense of undermining confidence in the currency.

In a real market this true price will fluctuate a little, but not a great deal over a short time.

With bitcoin we now, finally have a real market.  And currently we also have a land rush because it's growing in acceptance and there are scary, scary times in many national fiat currencies.  This appears to be driving up the price and I would be surprised if $250 isn't the natural strike price with a range of $225 - $275 at least for the coming year.

The drops we are seeing are because the major exchanges are being pushed off line by script kiddies executing DDOS attacks in the hopes of triggering a panic sell.
It seems to be working and the people who don't understand the fundamentals of bitcoin (most of them) assume that because the exchange was offline for a bit and perhaps the value dropped a bit that if they don't cash out right now, they're going to lose their shirt. 

This starts a cascade of frightened people willing to take a certain loss now in exchange for not taking an uncertain loss later.  In otherwords these people are attempting to buy confidence that they had suddenly lost and they're willing to buy it at ANY price.  The script kiddies wait a bit for the price to finish bottoming out, then start buying bitcoins up to sell at a profit before they launch their next attack and drop the price again.  They're mining the exchanges.

The net effect is that if I as a merchant want to use bitcoins even purely as a sweep currency, I could lose 50 or more percent on my sales because too many people are suddenly selling too many coins, too quickly, which actively interferes with commerce and undermines confidence in the currency.  The value of a currency is solely the confidence of the people accepting it.

(Which reminds me, someone really needs to talk to the exchanges about techniques for avoiding a DOS attack or at least mitigating it.  Getting knocked offline so many times I've actually been able to research and develop this idea, is starting to be a bit beyond a joke.)

[someguy123]

The drops we are seeing are because the major exchanges are being pushed off line by script kiddies executing DDOS attacks in the hopes of triggering a panic sell.
It seems to be working and the people who don't understand the fundamentals of bitcoin (most of them) assume that because the exchange was offline for a bit and perhaps the value dropped a bit that if they don't cash out right now, they're going to lose their shirt. 

This starts a cascade of frightened people willing to take a certain loss now in exchange for not taking an uncertain loss later.  In otherwords these people are attempting to buy confidence that they had suddenly lost and they're willing to buy it at ANY price.  The script kiddies wait a bit for the price to finish bottoming out, then start buying bitcoins up to sell at a profit before they launch their next attack and drop the price again.  They're mining the exchanges.

The sad thing is, it's hard to avoid this when exchanges just suddenly stop working properly, I wasn't able to sell at $250, and then it took me a long time just to get my funds out of Gox and into the safe-haven of BTC-e, by then I was pretty much broke, I played the market a little and now I have more coins than I started with originally, but the price is still a lot lower so I'm still at a loss.
Now that Bitcoin is so big, there's also a lot of people with too much money and no intelligence, e.g. some "big traders" actually listen to that horrid trollbox on BTC-e which screws the price up as it is, and causes more ridiculous drops and falls.
This drop itself has also given people more reason to panic sell, I mean anyone who just held on for most of the drop (like me), and hoped it went back up, now only has 20% of what they had at $250, which is a huge loss, which pretty much shows a lot of people that if they don't jump in with the panic sellers in time, they're capable of losing a damn lot of money.

(Which reminds me, someone really needs to talk to the exchanges about techniques for avoiding a DOS attack or at least mitigating it.  Getting knocked offline so many times I've actually been able to research and develop this idea, is starting to be a bit beyond a joke.)

At the most, MtGOX relies on Prolexic to keep them safe from DDoS attacks, which obviously isn't enough as we've seen plenty of lag and downtime.

[Nova!]

A circuit breaker would do nothing for the exchange at this point. The way to solve this moving the trading engine to it is own server/program. It is right now connected to the front-end. Also the great thing about bitcoins is how open and free market it is, if bitcoin free falls to $0.01 it should be able. Just like it should be able to go to $1000, if the market dictates it.

I disagree.  Allowing it to go into a total freefall will undermine the only real value the currency has, which is the confidence of the people using it.
But understand I'm talking about freefalls from market manipulations and attacks.
If the market drops less than 20% in a 24hr day that would never trigger a circuit breaker.  But having it drop $150 in the space of an hour, most of which is downtime due to the fact that the exchange is being attacked?  Come on.  You've got to agree, it would be a wise idea to stop trading and allow some of the more abusive trades to be unwound.  Give people a chance to breath.

I do agree with the part of detaching the front end from the backend though.  It seems ridiculous to have it setup that way.

[ZephramC]

I disagree.  Allowing it to go into a total freefall will undermine the only real value the currency has, which is the confidence of the people using it.
But understand I'm talking about freefalls from market manipulations and attacks.
If the market drops less than 20% in a 24hr day that would never trigger a circuit breaker.  But having it drop $150 in the space of an hour, most of which is downtime due to the fact that the exchange is being attacked?  Come on.  You've got to agree, it would be a wise idea to stop trading and allow some of the more abusive trades to be unwound.  Give people a chance to breath.

Remember unlike any other currency there are multiple exchanges. Maybe someone will setup like this, but I think the free market should rule. If a Dos can make bitcoin fall from $260 to $50, then let it. I think halting trading for that is going against what bitcoin is a complete free market.

I agree with that. There are far enough overregulated markets which are "protecting" people from their irrationality and mistakes they should face and learn from them. If this lesson teaches people not to trust one exchange than be it. If it teaches them that they should not value BTC only by fiat currencies then be it. Panic selling moves money from the less competent to the more competent. (As does naive clinging to BTC in the tines it should really be sold, of course.) I think that this will not kill bitcoin at all. It will make it stronger. (And perhaps open new markets for BTC value insurance services, pegged coins if desired, and so on.)

[mojod]

A circuit breaker would do nothing for the exchange at this point. The way to solve this moving the trading engine to it is own server/program. It is right now connected to the front-end. Also the great thing about bitcoins is how open and free market it is, if bitcoin free falls to $0.01 it should be able. Just like it should be able to go to $1000, if the market dictates it.

When I read Nova's post I didn't think that he was suggesting that a circuit breaker would fix the exchange's problem, just like a real life circuit breaker doesn't fix the electrical fault in your house wiring when some dumbshit threw a toaster in the bathtub. It prevents the house from burning down. 

[mojod]

A circuit breaker would do nothing for the exchange at this point. The way to solve this moving the trading engine to it is own server/program. It is right now connected to the front-end. Also the great thing about bitcoins is how open and free market it is, if bitcoin free falls to $0.01 it should be able. Just like it should be able to go to $1000, if the market dictates it.

When I read Nova's post I didn't think that he was suggesting that a circuit breaker would fix the exchange's problem, just like a real life circuit breaker doesn't fix the electrical fault in your house wiring when some dumbshit threw a toaster in the bathtub. It prevents the house from burning down. 

Now think about it if that toaster was thrown in the bathtub every day, wouldn't you at some point get a new toaster. That is where the issue is. Circuit breaking wouldn't fix anything. It would be tripped every day, and just kill trading.

I acknowledge that you have pointed out that if the breaker was tripped over and over, this will have a ripple affect on the flow of trading. That is valid.

You seem to have missed my point entirely. Let's pretend that whatever was causing the engine lag is not happening anymore. That is not the topic of this thread.

Why would you not want to have something like this in place?  So far it seems like your main argument is that you think that the market should be entirely free, and no one appears to be proposing that a regulation be put in place that forces all exchanges to implement this. It seems like a common sense good practice to follow and this thread might be a good place to hammer out that framework. Not discuss how you think that the coders of the engine are idiots.

[Nova!]

A circuit breaker would do nothing for the exchange at this point. The way to solve this moving the trading engine to it is own server/program. It is right now connected to the front-end. Also the great thing about bitcoins is how open and free market it is, if bitcoin free falls to $0.01 it should be able. Just like it should be able to go to $1000, if the market dictates it.

When I read Nova's post I didn't think that he was suggesting that a circuit breaker would fix the exchange's problem, just like a real life circuit breaker doesn't fix the electrical fault in your house wiring when some dumbshit threw a toaster in the bathtub. It prevents the house from burning down. 

Now think about it if that toaster was thrown in the bathtub every day, wouldn't you at some point get a new toaster. That is where the issue is. Circuit breaking wouldn't fix anything. It would be tripped every day, and just kill trading.

I acknowledge that you have pointed out that if the breaker was tripped over and over, this will have a ripple affect on the flow of trading. That is valid.

You seem to have missed my point entirely. Let's pretend that whatever was causing the engine lag is not happening anymore. That is not the topic of this thread.

Why would you not want to have something like this in place?  So far it seems like your main argument is that you think that the market should be entirely free, and no one appears to be proposing that a regulation be put in place that forces all exchanges to implement this. It seems like a common sense good practice to follow and this thread might be a good place to hammer out that framework. Not discuss how you think that the coders of the engine are idiots.

I am still not seeing your point can you clearly state it cause it sounds like circuit breaker would be a regulation and would overall hurt bitcoin trading.

Sure, it's just a ruleset that any exchange can follow to make themselves and bitcoin less of a target to the sorts of manipulations we are seeing right now. 
If a then b.  It could be implemented by any exchange to reduce the value of these attacks.
It wouldn't be anything more than that.  If an exchange wants to adopt it, it would be up to them to do so and craft the particular implementation.

I may implement a free to use exchange in node.js or something as an example of how this would work, perhaps provide a RESTful trading API or something.  Just for proof of concept purposes.  I would probably base it on the mtgox websockets API and just extend that API to show how I think a circuit breaker should be done.

This discussion is more or less to help solidify what the ruleset should look like (if a then b).  One thing is for certain, having bitcoin in a freefall due to mass panic does nothing to spur long term adoption of the currency and harms the confidence of the merchants and individuals that would like to use it for a day to day spending. 

[Nova!]

Sure, it's just a ruleset that any exchange can follow to make themselves and bitcoin less of a target to the sorts of manipulations we are seeing right now.  
If a then b.  It could be implemented by any exchange to reduce the value of these attacks.
It wouldn't be anything more than that.  If an exchange wants to adopt it, it would be up to them to do so and craft the particular implementation.

I may implement a free to use exchange in node.js or something as an example of how this would work, perhaps provide a RESTful trading API or something.  Just for proof of concept purposes.  I would probably base it on the mtgox websockets API and just extend that API to show how I think a circuit breaker should be done.

This discussion is more or less to help solidify what the ruleset should look like (if a then b).  One thing is for certain, having bitcoin in a freefall due to mass panic does nothing to spur long term adoption of the currency and harms the confidence of the merchants and individuals that would like to use it for a day to day spending.  

Now can you explain how moving the trade matching engine to an offline machine, does not do the same thing? If a trading engine was not access able directly thru the frontend as it is now, these attacks would also not cause any value harm. But again these rulesets would be going off more then once a day, Mt Gox and bitstamp two of the biggest exchanges, and the exchanges that would have to be the ones to apply them, get DDOS thru out the day, just like google and other huge companies. These rules would be going off and off all the time, so can explain how that would foster growth, and not hurt trading?

Instead of piggy backing off mtgox, setup a node exchange on the testnet, then randomly set off the exchange rulesets these would be the best way to show off the example.

Of course they would be going off several times a day.  The point is that if the price takes a precipitous drop, there must be something wrong with the market.  Things need to slow down and let cooler heads prevail.  A bank run is never a good thing.  There is no logical reason for the price to drop drastically other than active manipulation.  This works by adjusting the market fundamentals to make a DDOS an unprofitable endeavor.  If people can't panic sell, then the market has time to recover.  Unless you're doing naked shorting of bitcoins, this should make absolute sense to you.

Also you missed my point about the API.  You seem to think I'm hooking it to MtGox, that's not what I said.  What I said is I would likely use the MtGox API (probably should have put the word API description) as a base and extend it.  In otherwords, make a simple trading engine, probably in node.js.  In that engine expose a trading API identical to what MtGox exposes, except add extensions to notify about this additional activity.  It only makes sense if you realize that many people use the trading API to trade and thus software written to accept the MtGox API could easily be modified to accept an exchange using an identical but extended API.

As far as trade matching moving to an offline box, that has nothing to do with the principal of an exchange with a circuit breaker.  That's just a method of dealing with a DDOS.  It's a good idea on it's own, but sort of misses the whole point.  A circuit breaker attempts to nullify the reward for a DDOS or any other attack, by keeping the price stable. It does so by restricting the number of southbound trades during the cooling off period.   Even a sustained DDOS should have no effect on trading prices.  If 1 bitcoin is averaging $100 then probably worth a hundred dollars regardless of if the exchange is pushed offline or not.  The point is to watch for a precipitous drop in price and then halt trading and gradually restore it, giving the market time to recover.

I do admit that this could cause arbitrage opportunities to appear, but at least the price would remain stable enough one could conduct business.

[shibaji]

Mt.Gox needs to mature. Just look at any stock exchange and implement same protocols.

[Nova!]

So how does this allow a real panic sell to happen? You are talking about stopping the market so DDOS is unprofitable yet there are many ways to do that with out a ruleset to halt trading. Again this going to kill traders like me, who use a bot. I make most of my gains when a panic sell happens. So right there your stopping the free market, and making your exchange "normal" yet this is so young that you can't possible know what the normal price of bitcoin should be.

I'm going to bed soon so I'm only going to quote this part since it's the only relevant part anyways.

The point is to cut off a panic sell before it does long term damage.  A temporary halt to trading and a gradual return to normal after a dramatic drop in price would give an exchange a chance to catch it's breath and allow cooler heads to prevail.  Bot trading can still be profitable.  If the price is heading south, it's heading south, nothing about a circuit breaker would stop that, it would just slow it down a bit and give people a chance to decide whether or not it is actually going down or just a hiccup.   

You are a short trader gweedo and while there is nothing wrong with that, there is something wrong with people forcing the price down by lying about it.  That can be a rumor that is spread, or a DDOS attack or anything else that looks like the value of the currency is about to be undermined.

If the market drops because people genuinely don't want their bitcoins anymore then that's the way the market is headed.  But is it really fair that those of us who use bitcoins for daily commerce must run a significant risk of losing 50% on the value of our holdings just because the market was artificially being forced down?

Here is the scenario I'm talking about...

Joe's surfboard shop in La Playa, sells surfboards for $100.  He allows his customers to come in and purchase with bitcoins.  At $100 per bitcoin that means he only needs to charge 1BTC to his customer.  But Joe has to buy materials and his materials cost him USD.  Therefore he's setup with a sweep account.  As soon as the customer's transaction is confirmed, it is swept from BTC to USD.  That sweep can take a period of 15 minutes to an hour depending on how many confirmations are needed.

During this time Gweedo and company (nothing personal here, but this is exactly what you are condoning so we may as well put your face to it.) decide it would be a good idea to drive the price of bitcoins down by spreading a rumor that the exchange is about to go bankrupt, "Hey look guys, the exchange is offline, better sell quick as soon as it's up!". 

This causes a run on the bank and everyone tries to dump their bitcoins at market value.  This drives bitcoins down to $50 in the space of 30 minutes.  Gweedo knows that the value seems to be trending at $100, so he and his friends start buying up bitcoins in hopes that in a week or so the price will recover and they can sell when the price tops out again.

This means that Joe has now lost 50% on the sale of his surfboard in the space of that same hour.  If the price had moved between 90 & 110 Joe would have been fine, but at this point he is now forced to either hold onto his bitcoins and hope the price will rise.  Or sell for what he can get and just eat the loss.  Because he has to pay rent and his suppliers and none of them actually accept bitcoin directly, he is forced to sell and take a loss.

Now Gweedo, your opinion is that this is just fine.  Joe can take the loss so you can make a profit.  After all, Joe knew the risks and accepted them. Joe is just a sucker, as long as Gweedo and his bot make a profit, all is good. 

However Joe is not forced to accept bitcoins.  He does so as a convenience to his customers.  His acceptance of bitcoins and the acceptance of thousands of other merchants just like him, helps strengthen the price of bitcoins for everyone including you.  That acceptance is predicated on the premise that the price of those bitcoins will remain stable long enough for him to get into and out of his position.  If the price can crash 50% in an hour then that will cause him to lose confidence in the currency.  When people lose confidence in the currency they stop accepting it and if they stop accepting it then the price is driven down further, but this time it won't recover.

Therefore Joe needs to use an exchange with a circuit breaker, or some other mechanism that can allow him to get into and out of his position without suffering a significant loss in the middle.  Gweedo on the other hand needs to use an exchange that is susceptible to wild pricing fluctuations so he can make a profit when people are fooled into believing that bitcoins are suddenly worth nothing.

The value of any currency is really just a reflection of the level of confidence that people have in that currency.

[ZephramC]

I know it sound harsh, but what about this:
People who panic sell based on wrong calculation (either based on emotion without checking the facts, or clinging to false hopes or simply not interpreting the facts right) deserve to loss their money. Any system which limits or even prohibits their losses, shields them and "nanny" them from their own mistakes is doing bad job.
How would circuit breaker ensure this, how would it ensure that such people are hit hard?

Do not get me wrong. This is not only because the wealthy and rich and smart deserve to profit on the expense of the abovementioned ones. It is side effect, of course. But the main point of view in it is that this is the only way how the panic sellers will learn to assess facts better next time. If you know that someone will always rescue you from your mistakes, you have no incentive to avoid them.

This does not mean spreading false information or direct attacks like DDoS are ok. On the contrary. But people should learn to choose their exchanges and to change them based on the rules. I would be happy if there is a exchange with circuit breaker and clearly defined rules of its operation and exchange without it working independently. We can even have exchanges baning trade bots and HFT. As long as it is not presented as something every exchange should adopt. You can choose which exchange you trust (with trading, with pricing).