How to fix the exchanges - a professional view.

[ex-trader]

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........

[dyseac]

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

This would definitely be a good start...

[Sage]

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

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.

[gollum]

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........

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

[Dr.Steve]

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

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.

+1

[ex-trader]

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

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.

[Capitan]

What is a market maker?

[Seagull]

which is why you do not see gold or Forex stop trading.

Hmmmm, all the brokers and exchanges close every weekend.

[ex-trader]

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.

[proudhon]

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

[Minor Miner]

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.   

[siggy]

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

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

[Minor Miner]

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

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

[kiko]

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.

[Sukrim]

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

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.

[Manticore]

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

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

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

[gollum]

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

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

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.

[Manticore]

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 erratic. 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........

I'll add....

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

8. Expand derivatives markets.

[gollum]

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 erratic. 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........

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.

[silzero]

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.