Is it possible for mt. gox or tradehill to scam you whenever you trade?

[bitboy999]

Hi,

I just had a thought that sounds pretty obvious, but maybe there is an obvious answer which I don't see.

So, imagine such a situation:

The best sell BTC order on an exchange site is 10USD/BTC. I put in a buy BTC @11USD/BTC, and am counting on it to be fulfilled at 10USD/BTC, because there is such a sell offer.
Now, the exchange sees those two offers, and instead of matching them, they buy from the other guy at 10USD/BTC, and sell me for 10.8USD/BTC. And then they say: a dark pool buy order came in at 10.2USD/BTC, and we matched the 10USD/BTC sell order with this, while your buy @11USD/BTC order got fulfilled by a dark pool sell order at 10.8USD/BTC.

Is this possible, or am I missing something? And if it is, then how do you know if this is not happening all the time?

Thanks,
Bitboy999

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[Mr. Flibble]

 

Hi,

I just had a thought that sounds pretty obvious, but maybe there is an obvious answer which I don't see.

So, imagine such a situation:

The best sell BTC order on an exchange site is 10USD/BTC. I put in a buy BTC @11USD/BTC, and am counting on it to be fulfilled at 10USD/BTC, because there is such a sell offer.
Now, the exchange sees those two offers, and instead of matching them, they buy from the other guy at 10USD/BTC, and sell me for 10.8USD/BTC. And then they say: a dark pool buy order came in at 10.2USD/BTC, and we matched the 10USD/BTC sell order with this, while your buy @11USD/BTC order got fulfilled by a dark pool sell order at 10.8USD/BTC.

Is this possible, or am I missing something? And if it is, then how do you know if this is not happening all the time?

Thanks,
Bitboy999

So you mean there
Sell BTC@$10
and Buy BTC@11

and then mtgox/tradehill instead of making the sale at $10 places it's own Buy@10.1, gets the bitcoins and then does a Sell@10.8. Meaning that the original buyer pays 0.8 BTC more than they should, and the exchange owner makes $0.7 extra profit free?


If this is the case it seems like people place a lot of trust in the exchange owners....
I'm not sure if this is correct tho - anyone else know if it is?

[Maged]

This is known as front running, which is highly illegal on regulated exchanges. Of course, Bitcoin exchanges aren't regulated, so they could get away with it. However, they'd lose all of their business as soon as we found out it was happening.

[indicasteve]

Yea, I thought about this scenario while developing my exchange.

To solve the problem, I programed my system to not accept buy orders that are higher than the current sell order and vice-versa.  If a user tries to place such an order, it prompts the user to do an 'instant trade' instead to get the best rate available.

I don't understand why someone would place a buy order higher than the current best sell rate, but in such an event, the exchange shouldn't fill the order itself and prosper IMO.

But you are correct, a "dark pool" type system could very well hide such practices.