The Mt Gox Master Plan

[JoelKatz]

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

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.

[Dobrodav]

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

[bitrebel]

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?

Not true. The exchange operator would have access to the tails of the order book that other traders can not see. That information could be used to set superior (better informed) market positions. I know that the order book is truncated because I have placed orders out in those tails myself and they were never visible.

Yes, this is more what I was getting at.

[TraderTimm]

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.

[bitrebel]

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.

[JoelKatz]

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.

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.

[Epinnoia]

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.  

[CryptoCommodity]

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?

Not true. The exchange operator would have access to the tails of the order book that other traders can not see. That information could be used to set superior (better informed) market positions. I know that the order book is truncated because I have placed orders out in those tails myself and they were never visible.

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.

[CryptoCommodity]

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.

[CryptoCommodity]

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.

[CryptoCommodity]

Sry I am driving and typing....

[joepie91]

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.

Noone is forcing you to read this thread.

[beeph]

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

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