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Author Topic: What's to stop the following type of market manipulation (example using TH)?  (Read 1320 times)
marvinmartian
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June 29, 2011, 09:48:31 PM
 #1

Just thinking out loud here.  

*** The following assumes I have 2k or more of btc already purchased at around $17 ea.

Let's say I go on Tradehill right now and buy up all the ask orders up to $20 (about 5.5k btc).  That would in effect raise the price to $20 on that exchange, assuming my orders get fired off in a timely fashion.  

[Insert:  I think I'm missing something here about my ability to make the price go up to $20 in the above step ... but I don't see where.]

Once I've done that (bought all shares up to $20) I then put a massive sell order (for all my shares ~ 7.5k btc) in at just below $20 (eg., $19.5) which includes the 2k of coins from *** above.

Seems like guaranteed profit to me.  

I'm always wary of guaranteed profit so thought I'd check here.

PS.  If you implement the above and make a fortune, please donate to me at 1ANHjo35p88GanFoe1Rawb5straQpE8Sfq

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June 29, 2011, 10:13:08 PM
 #2

assuming you bought enough btc to move the market (which would take a LOT of cash) there is no guarantee you can sell them at the ask price. in fact selling all those coins at once would crash the price of the stocks you were trying to sell (killing your profit) unless you were selling dark pool.

in fact, a massive selloff (like you propose) crashed mtgox and drove the price to .01
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June 29, 2011, 10:14:29 PM
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Let's say I go on Tradehill right now and buy up all the ask orders up to $20 (about 5.5k btc).  That would in effect raise the price to $20 on that exchange, assuming my orders get fired off in a timely fashion.  

[Insert:  I think I'm missing something here about my ability to make the price go up to $20 in the above step ... but I don't see where.]

You are.  You haven't distinguished between "ask" and "bid" prices.

Your buy up of ask orders does nothing to the bid orders.  They would remain at the lower price, so when you come to sell, you would make a huge loss.

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marvinmartian
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June 29, 2011, 10:18:01 PM
 #4

To get around that, couldn't I just follow with my own bid orders closely following my ask / buy orders.  That would keep the bid/ask intersection close to where I'm buying.

Plus, as I buy, I'd be increasing the highest bid order.  I suspect others would trail behind.  No?


Let's say I go on Tradehill right now and buy up all the ask orders up to $20 (about 5.5k btc).  That would in effect raise the price to $20 on that exchange, assuming my orders get fired off in a timely fashion.  

[Insert:  I think I'm missing something here about my ability to make the price go up to $20 in the above step ... but I don't see where.]

You are.  You haven't distinguished between "ask" and "bid" prices.

Your buy up of ask orders does nothing to the bid orders.  They would remain at the lower price, so when you come to sell, you would make a huge loss.

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June 29, 2011, 10:30:07 PM
 #5

Let's say I go on Tradehill right now and buy up all the ask orders up to $20 (about 5.5k btc).  That would in effect raise the price to $20 on that exchange, assuming my orders get fired off in a timely fashion.  

[Insert:  I think I'm missing something here about my ability to make the price go up to $20 in the above step ... but I don't see where.]

Once I've done that (bought all shares up to $20) I then put a massive sell order (for all my shares ~ 7.5k btc) in at just below $20 (eg., $19.5) which includes the 2k of coins from *** above.

Seems like guaranteed profit to me.  
No, no profit.

1) You buy up all the ask orders up to $20. You're out about $100,000. You have 5,500 bitcoins that you paid more than fair market value for. Not looking good so far.

2) You place a massive sell order for all your shares at $19.50. But nobody buys them because $19.50 is way above fair market value. Obviously, there are no buy orders in already at that price or they would have completed. And nobody's going to be dumb enough to buy them when the price is obviously way above fair market value. (Well, maybe a few bitcoins will sell, but not many).

3) Other people see that the price is above market value and they decide to take advantage of the opportunity your waste of $100,000 has bought them. They put their shares in at $19.00. These orders still don't complete because that's still too high. But a few more people decide to take advantage of the opportuntity to sell at $18.75. The price starts dropping fast and your sell orders never completed. Soon, the price is back to fair market value. You're left with a bunch of bitcoins you overpaid for.

I am an employee of Ripple.
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DrYe5
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June 29, 2011, 10:33:21 PM
 #6

Let's say I go on Tradehill right now and buy up all the ask orders up to $20 (about 5.5k btc).  That would in effect raise the price to $20 on that exchange, assuming my orders get fired off in a timely fashion.  

[Insert:  I think I'm missing something here about my ability to make the price go up to $20 in the above step ... but I don't see where.]

Once I've done that (bought all shares up to $20) I then put a massive sell order (for all my shares ~ 7.5k btc) in at just below $20 (eg., $19.5) which includes the 2k of coins from *** above.

Seems like guaranteed profit to me.  
No, no profit.

1) You buy up all the ask orders up to $20. You're out about $100,000. You have 5,500 bitcoins that you paid more than fair market value for. Not looking good so far.

2) You place a massive sell order for all your shares at $19.50. But nobody buys them because $19.50 is way above fair market value. Obviously, there are no buy orders in already at that price or they would have completed. And nobody's going to be dumb enough to buy them when the price is obviously way above fair market value. (Well, maybe a few bitcoins will sell, but not many).

3) Other people see that the price is above market value and they decide to take advantage of the opportunity your waste of $100,000 has bought them. They put their shares in at $19.00. These orders still don't complete because that's still too high. But a few more people decide to take advantage of the opportuntity to sell at $18.75. The price starts dropping fast and your sell orders never completed. Soon, the price is back to fair market value. You're left with a bunch of bitcoins you overpaid for.


+1

On the plus side however, you've evened the market volume and lowered the systemic risk in BTC trading.

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marvinmartian
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June 29, 2011, 10:35:33 PM
 #7

I'd like to say first that "fair market value" is whatever the market says it is.

So I sell my shares at $18.75 (your example below) then and follow the price back down to $17.

It's not a crazy assumption to suggest that "on my way up to $20" I've actually paid on average about $18.5 for those shares.  So I've got about 5k shares at $18.5 and another 2k at $17.

If I sell them all at $18.5 I'm still very much in the green.

No, no profit.

3) Other people see that the price is above market value and they decide to take advantage of the opportunity your waste of $100,000 has bought them. They put their shares in at $19.00. These orders still don't complete because that's still too high. But a few more people decide to take advantage of the opportuntity to sell at $18.75. The price starts dropping fast and your sell orders never completed. Soon, the price is back to fair market value. You're left with a bunch of bitcoins you overpaid for.


"... and the geeks shall inherit the earth."
marvinmartian
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June 29, 2011, 10:41:35 PM
 #8

The price went down because that was their intent.  They drove the price in the other direction.

Basically, the massive selloff lends credence to what I'm saying, just in the other direction.  So you could implement that strategy, then buy up a TON of bitcoins when the price has been driven down so far ... then wait for it to come back up.

assuming you bought enough btc to move the market (which would take a LOT of cash) there is no guarantee you can sell them at the ask price. in fact selling all those coins at once would crash the price of the stocks you were trying to sell (killing your profit) unless you were selling dark pool.

in fact, a massive selloff (like you propose) crashed mtgox and drove the price to .01

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June 29, 2011, 10:45:34 PM
 #9

I'd like to say first that "fair market value" is whatever the market says it is.
Usually, yes. But when the market is being intentionally manipulated, it's not. So in this case, the price does deviate a bit from fair market value. But the person who made it do that loses money. You can always manipulate prices to be unfair if you're willing to burn money to do so.

For example, you buy up lots of oil and watch the price go up. But what do you do with all that oil when the price goes down? As soon as you stop buying, the price rockets down. And you can't be selling while you're buying.

Quote
So I sell my shares at $18.75 (your example below) then and follow the price back down to $17.
The price will drop so fast, it's very unlikely you'll make back your money. But if you did, it's because some suckers bought at an unfairly high price. You can always make money if there are suckers.

Quote
It's not a crazy assumption to suggest that "on my way up to $20" I've actually paid on average about $18.5 for those shares.  So I've got about 5k shares at $18.5 and another 2k at $17.

If I sell them all at $18.5 I'm still very much in the green.
You won't be because the volume as the price drops will be very, very low. Whereas the volume as the price goes up will be very, very high.

When the price is above its medium-term average, people are anxious to sell. They know they're getting a probable windfall. So it takes a lot of shares to push the price up. The net effect is that in the very short term, the further the price is from the medium-term average, the more it wants to go back to the middle and the harder it is to keep pushing it. Sell orders will keep flooding in and buy orders will not. So the part you are paying for is "uphill" and the part you are getting paid for is "downhill".

I am an employee of Ripple.
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marvinmartian
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June 29, 2011, 11:12:11 PM
 #10

Therein lies the rub (and the gambit).  I'll have to try some tests.

In the meantime, I'll go back to step 1:  collect underpants.

;-)

When the price is above its medium-term average, people are anxious to sell. They know they're getting a probable windfall. So it takes a lot of shares to push the price up. The net effect is that in the very short term, the further the price is from the medium-term average, the more it wants to go back to the middle and the harder it is to keep pushing it. Sell orders will keep flooding in and buy orders will not. So the part you are paying for is "uphill" and the part you are getting paid for is "downhill".


"... and the geeks shall inherit the earth."
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June 30, 2011, 01:21:18 AM
 #11

Just because you buy up all the Asks, doesn't mean the Bids will move it all.

I don't know why, but someone basically did this on Bitcoin7 today.  There was only ~10-20btc of volume between 17 and 20, so they bought them all and placed them back on the market for like 19.90.  Within minutes people were undercutting that price and the spread remained HUGE (Highest Bid was still 16.5).  And as far as I could tell there were next to no transactions at the ridiculously higher prices.

Really not trying to be a jerk, but just think about it a little longer and you'll see exactly why this won't work.  You can only move the Bids ***OR*** Asks, not both.
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June 30, 2011, 01:49:19 AM
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You're not being a jerk at all.  This was a totally hypothetical question anyhow.  If I had really (strongly) thought that it would have worked, I wouldn't have posted about it.  ;-)

Really not trying to be a jerk, but just think about it a little longer and you'll see exactly why this won't work.  You can only move the Bids ***OR*** Asks, not both.

"... and the geeks shall inherit the earth."
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June 30, 2011, 03:22:28 AM
 #13

You're not being a jerk at all.  This was a totally hypothetical question anyhow.  If I had really (strongly) thought that it would have worked, I wouldn't have posted about it.  ;-)

Really not trying to be a jerk, but just think about it a little longer and you'll see exactly why this won't work.  You can only move the Bids ***OR*** Asks, not both.

Now work with another trader to build technical support and you'd be in trouble.

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June 30, 2011, 02:37:25 PM
 #14

I think people are omitting the psychological factor. 

If you were to buy up all the coins to a certain price point and did so in a stepwise manner, it would look no different from a real rally and the price would move.  However people would probably jump in and buy too so it would actually be a real rally.  The market is so small that this is very feasible, only it will cost 10s of thousands of dollars to make happen. 

Or not.  The market is not static and it reacts to changes in an unpredictable way.  You can predict possible outcomes and hedge your bets accordingly, but that's about it. 

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June 30, 2011, 03:12:15 PM
 #15

What dinzy says is correct. Especially if you can take the price above a trading range, and doubly so, if there's room to breathe until the next point of resistance.

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June 30, 2011, 11:50:38 PM
 #16

I think people are omitting the psychological factor. 

If you were to buy up all the coins to a certain price point and did so in a stepwise manner, it would look no different from a real rally and the price would move.  However people would probably jump in and buy too so it would actually be a real rally.  The market is so small that this is very feasible, only it will cost 10s of thousands of dollars to make happen. 

Or not.  The market is not static and it reacts to changes in an unpredictable way.  You can predict possible outcomes and hedge your bets accordingly, but that's about it. 



This is true until you have access to other exchanges.
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