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Author Topic: URGENT: What is next and legitimate on MtGox after the security issue?  (Read 7143 times)
S3052
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June 19, 2011, 08:33:35 PM
 #1

Having followed and covered the market since Oct 2010, I am concerned about all people investing / trading / loving bitcoins after what happened today.

There are a couple of questions:

1) Is it legitimate to rollback trades or should the exchange cover the risks?

2) What happens to people trading on the other exchanges who where negatively/positively affected by what happened at MtGox?

3) How / when should the market reopen?
Should orders of users on MtGox be put back where they were before the crash? or is it fairer to ask them whether they want or not?
... many more questions...

It would be great to have some people experienced in exchanges helping to get an unbiased assessment quickly - to protect all users, and to at least have a chance to re-establish some trust on bitcoins.

I am sad, because this was predictable and many including me have warned that we need better, more secure exchanges.



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June 19, 2011, 08:41:15 PM
 #2

I suggest a few options-

1)  The exchange needs to be closed for 1-3 hours a day for maintenance and security upgrades.
2)  The exchange should be closed when there is not an actual person representing the exchange online and ready to support the functions of the exchange
3)  The exchange should be closed on Saturday and Sunday since most people cannot get funds in and out on these days anyway.  It can also be used for an extended maintenance period.
4)  The exchange should limit the maximum amount of BTC to be placed in a buy/sell order (I think 1 to 5 thousand BTC is MORE than reasonable).  Users should only be able to have a certain amount of buy/sell orders open.
and what I think is the most important one-
5)  GET RID OF THE TRADING API!  BOTS ARE NOT GOOD FOR EXCHANGES!  They have been manipulating the market non-stop.  Get-rid of the API and the bots go away.

Mt.Gox has been resting on it's laurels too long, the site owner(s) have been sleeping at the wheel and dreaming of all their profits.


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June 19, 2011, 08:41:30 PM
 #3


1) Is it legitimate to rollback trades or should the exchange cover the risks?

Yes, legitimate to rollback trades, since they are unregulated and all members are aware of that status. It is legit for them to decide, IMO.

2) What happens to people trading on the other exchanges who where negatively/positively affected by what happened at MtGox?

That is part of the risk of trading.

3) How / when should the market reopen?
Should orders of users on MtGox be put back where they were before the crash? or is it fairer to ask them whether they want or not?

Open orders is a tough call. Again, it is MtGox's decision to make, and I have no clue on what is fair in that case. If you remove the buy orders, how is that fair to the sellers?

Thank you for an interesting thread...

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June 19, 2011, 08:44:04 PM
 #4

And we had to learn the hard way.

I would say drop ALL outstanding orders (buy and sell), no rolling back (just not possible) and let MtGox handle things with the person whose account caused this trouble (instead of handling things with 60000 people).

MtGox earned a lot from trading with last 6 months (the 0.65% fee), they should be able to cover most of the costs. Having roll backs would cause law suits, which might even cost more.
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June 19, 2011, 08:44:30 PM
 #5

Orders should not be reversed.  That's just MtGox trying to cover his rear.  What SHOULD happen is all trades should be processed as normal, and MtGox should refund the guy who was hacked.  It was MtGox's fault, so they need to step up and fix it.  Fixing it does not mean reversing all trades.  Fixing it means restoring what was stolen due to their incompetence.
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June 19, 2011, 08:45:59 PM
 #6

What's your suggestion?

SELL

That's mine.
Don't sell, bitcoin wasn't compromised.

But bitcoin doesn't have to suffer from Mt Gox problems.

I've heared only good things of Trade Hill.

It's great time to close your Mt Gox account and move somewhere else to make it clear that such a poor-secured service is not acceptable.

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June 19, 2011, 08:48:06 PM
 #7

Agree that it is difficult...

and there is one important overall question:

Is the fact that the BTC market was unregulated equaling that the exchange owner can just do anything?

I guess many people buying bitcoins at MtGox  were -  rightly or wrongly -  assuming that standard exchange practices were followed. Shouldn't now standard exchange principles apply?

The fact that bitcoin is unregulated does not automatically mean that an owner can just ignore standard existing practices of exchanges (and that's what it is).

Does someone have some standard knowledge of how normal exchanges would need to treat the issue that happend today on bitcoins?

Including placing bid / asks order again where they were or not?

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June 19, 2011, 08:49:51 PM
 #8

Orders should not be reversed.  That's just MtGox trying to cover his rear.  What SHOULD happen is all trades should be processed as normal, and MtGox should refund the guy who was hacked.  It was MtGox's fault, so they need to step up and fix it.  Fixing it does not mean reversing all trades.  Fixing it means restoring what was stolen due to their incompetence.

This is what typically also happens on other exchanges, correct.

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June 19, 2011, 08:51:38 PM
 #9

What's your suggestion?

SELL

That's mine.
Don't sell, bitcoin wasn't compromised.

But bitcoin doesn't have to suffer from Mt Gox problems.

I've heared only good things of Trade Hill.

It's great time to close your Mt Gox account and move somewhere else to make it clear that such a poor-secured service is not acceptable.

I agree with this. Mt Gox is responsible here. Mt. Gox needs to pay up. Something like this could realistically kill BTC if people see things like this are possible and exchanges dont back them up.


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June 19, 2011, 08:54:12 PM
 #10

Yes, it's legitimate to rollback the trades. If something along these lines happened on a major public exchange, they'd strike all of the affected trades there as well. Think 2010 NYSE flash crash.

Probably nothing will be done for other exchanges. In the future they'd all probably benefit from an agreement to be able to suspend trading together in extreme circumstances or at least agree on standardized levels of circuit breakers, but it's possible the players might not see the long term benefits of such a strategy.

To act like a professional market, they should only open after a complete security review and at a pre-announced time. Customers should have 12-24 hours advance notice before trading begins again if they want to have any hope of an orderly restart. They should also make sure that people can get into their accounts, perform their password resets, move money in or out at their preference and book any new orders they want before trading begins.

They absolutely need to cancel all standing orders.
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June 19, 2011, 08:54:56 PM
 #11

I think the roll-back is fair, but my opinion doesn't matter, IMO.  Cheesy
It's their right to decide, and you have no legal recourse in an unregulated exchange.

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June 19, 2011, 08:57:29 PM
 #12

Agree that it is difficult...

and there is one important overall question:

Is the fact that the BTC market was unregulated equaling that the exchange owner can just do anything?

I guess many people buying bitcoins at MtGox  were -  rightly or wrongly -  assuming that standard exchange practices were followed. Shouldn't now standard exchange principles apply?

The fact that bitcoin is unregulated does not automatically mean that an owner can just ignore standard existing practices of exchanges (and that's what it is).

Does someone have some standard knowledge of how normal exchanges would need to treat the issue that happend today on bitcoins?

Including placing bid / asks order again where they were or not?


You tell us, you're the expert on this kinda stuff right?

I feel this is gonna seriously jack up the willingness to accept bitcoin now.
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June 19, 2011, 09:00:12 PM
 #13

Is the fact that the BTC market was unregulated equaling that the exchange owner can just do anything?...

The classic libertarian free-market response is that they need to keep their customers happy in order to encourage future business.
In this case, without the roll-back they might not have a future.
The drama continues, stay tuned...

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June 19, 2011, 09:01:05 PM
 #14

Yes, it's legitimate to rollback the trades. If something along these lines happened on a major public exchange, they'd strike all of the affected trades there as well. Think 2010 NYSE flash crash.
Are you certain this happened? It is not my understanding that the May 2010 flash crash transactions got reversed

Probably nothing will be done for other exchanges. In the future they'd all probably benefit from an agreement to be able to suspend trading together in extreme circumstances or at least agree on standardized levels of circuit breakers, but it's possible the players might not see the long term benefits of such a strategy.

To act like a professional market, they should only open after a complete security review and at a pre-announced time. Customers should have 12-24 hours advance notice before trading begins again if they want to have any hope of an orderly restart. They should also make sure that people can get into their accounts, perform their password resets, move money in or out at their preference and book any new orders they want before trading begins.

They absolutely need to cancel all standing orders.
+1 this makes a lot of sense.

And on top, if this takes long, people having funds on MtGox should be able to withdraw them (BTC and USD) and trade them on other exchanges if they want.

>15years analysis experience

Always do your own due diligence & consult your financial advisor. Never invest unless you can afford to lose your entire investment.

http://twitter.com/BitcoinAnalyst

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S3052
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June 19, 2011, 09:02:58 PM
 #15


You tell us, you're the expert on this kinda stuff right?

I feel this is gonna seriously jack up the willingness to accept bitcoin now.

--> zdmas

I am an expert in trading and market analysis, but not on exchange regulations.

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June 19, 2011, 09:07:48 PM
 #16

What's your suggestion?

SELL

That's mine.
Don't sell, bitcoin wasn't compromised.

But bitcoin doesn't have to suffer from Mt Gox problems.

I've heared only good things of Trade Hill.

It's great time to close your Mt Gox account and move somewhere else to make it clear that such a poor-secured service is not acceptable.

I agree with this. Mt Gox is responsible here. Mt. Gox needs to pay up. Something like this could realistically kill BTC if people see things like this are possible and exchanges dont back them up.



I agree.

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June 19, 2011, 09:08:24 PM
 #17

1) Is it legitimate to rollback trades or should the exchange cover the risks?

Yes, it's legitimate. If the exchange was compromised, as it was, then trading after that was revealed was "fruit of the poisoned tree." Because, no matter the exchange, there is going to be a period of time between the event and market stoppage, they would either need to verify each and every trade, or just roll back to a point prior to the compromise.

2) What happens to people trading on the other exchanges who where negatively/positively affected by what happened at MtGox?

Who cares? If they acted on knowledge of what happened on Mt. Gox, then they were making their own open-eyed decisions. The real concern is people who had orders on Mt. Gox and, if not for the exchange being compromised, would not have otherwise allowed or had their orders be filled. In other words, activities on other exchanges were in full control by traders, while Mt. Gox orders were filled, initially, erroneously and out of traders' control.

3) How / when should the market reopen?
Should orders of users on MtGox be put back where they were before the crash? or is it fairer to ask them whether they want or not?
... many more questions...

If they don't have a day-long period wherein people are permitted to change orders BEFORE the market is opened, then they might as well kiss the business goodbye. It's one thing having security compromised, on which blame could be placed elsewhere so long as Mt. Gox followed acceptable practices. It's another thing to roll back and then disallow traders to reconsider their orders before the market reopens. The security issues might be excusable, but the latter act would just invite a shit ton of lawsuit potential, as orders need to be made while traders have historical knowledge and have ample time to act. In other words, orders that were filled and then rolled-back CANNOT be filled again.

In the very least, they also need to provide time for the average trader to check out their account, change their password, and potentially remove or add funds before the frenzy of market opening begins. Otherwise, we're setting up for a crash just as bad.

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June 19, 2011, 09:10:26 PM
 #18

This reminds me of the Flash crash from 5/6/2010.  I saw the Mt Gox crash happen real time.  Totally wild.  If anything this suggests the need for a circuit breaker of some sort.  While they may be able to roll back some trades, I don't see how the can claw back coins already transferred.  I guess this is the reason I don't keep funds in any currency (bitcoin or USD) in these online sites until I am ready to trade.  Yes, I miss out on some opportunities, but these sites are run by a few individuals.  Obviously I have a fairly high tolerance to risk because I am trading with this currency, but leaving funds in an online account such as Mt Gox just seems too risky, even for me.
 

Oh and on larger exchanges, these events are usually cause by more benign means
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June 19, 2011, 09:11:08 PM
 #19

a 'rollback' in a situation like this would be extraordinary for an exchange in any currency market. it would be unprecedented in those markets to break a trade that resulted from a fraudulent conversion of funds. fraudulent conversion of currency is overwhelmingly conceived as being the problem of the person whose funds were wrongfully converted and those who insure against that (such as financial intermediaries and possibly the exchanges themselves) either by contract or by regulation.

this wasn't a breakdown of a currency exchange. this was the correct operation of a currency exchange following a theft of funds. the two are very different things, ethically and legally. that mt. gox is both a broker and an exchange is confusing people's intuitions. the problem here was with the broker side of the 'mt. gox' entity, not the exchange side of the entity. a lone broker would never be permitted to break a trade with counterparties as a result of theft; the only reason it's even on the table here is that mt. gox happens to have the power (though not the legitimate authority) to do it.

indeed, how would anyone (including mt. gox) even know there was a theft here? what would prevent a speculator from staging a theft and then insisting on a reversal of trades if he or she didn't like the way things turned out? that would let a large owner of coins play both sides of the fence, inappropriately.

in case it matters, i don't have a financial account at mt. gox. (apparently fortunately, in view of the leak, given that i have attempted to remain anonymous) and don't have any other relationship with them.
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June 19, 2011, 09:14:41 PM
 #20

Are you certain this happened? It is not my understanding that the May 2010 flash crash transactions got reversed

Yeah. I don't know that they cancelled everyone's trades, but I know they cancelled quite a few. It's possible they saw market makers and HFT as suitably responsible for their own actions. But I personally had a stop that was blown through that was cancelled that evening. I also remember reading about it in the journal the next day.

I didn't spend much time searching, but here is a mention by the NYSE of the cancels:

http://www.nyse.com/about/nyseviewpoint/1275386358825.html

Quote
Hours after the market's wild ride, thousands of trades on electronic exchanges were cancelled on a somewhat arbitrary basis, leaving investors questioning the integrity of the marketplace.

So it seems they didn't cancel them all, but it seems it would be "fairest" to do so. I absolutely guarantee that if the NYSE or NASDAQ lost control of their system and hackers made huge market crashing trades they'd stop trading and walk everything back.
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