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Author Topic: Would a 100% dark pool exchange work?  (Read 761 times)
JohnDoe
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August 11, 2011, 12:13:14 AM
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The usual complaint about dark pools is that it makes the market look too thin and therefore not worth it despite the advantages of low volatility and low spreads. So what if the market depth was scrapped entirely to avoid that? No bids and asks, the only information you would have is the trade history and volume. Would such an exchange be viable or would it have some huge disadvantages?
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JoelKatz
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August 11, 2011, 12:23:10 AM
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Less information means greater risk. Since every transaction on your exchange would have higher risk than an otherwise similar transaction on a more open exchange, you'd have to charge lower commissions to get my business. Otherwise, what compensates me for the greater risk I'm taking? Keeping my transactions secret from other people doesn't benefit me very much, but not being able to see the market I'm trading into harms me quite a bit.

I am an employee of Ripple.
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JohnDoe
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August 11, 2011, 12:41:37 AM
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Less information means greater risk.

How is risk introduced into this? I'd say risk is reduced because your orders have a lower chance of moving the market, so your orders will end up costing less.

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Since every transaction on your exchange would have higher risk than an otherwise similar transaction on a more open exchange, you'd have to charge lower commissions to get my business.

Let's assume this exchange has no transaction fees for the purpose of this discussion.

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but not being able to see the market I'm trading into harms me quite a bit.

I'd agree if some people had the information and others didn't but since nobody has the market depth then I don't see how it's harmful. Plus I would argue that in an transparent market you don't have all the information either because of trading bots.
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August 11, 2011, 02:16:55 AM
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If it wasn't the only exchange in existence, then I'd just try to either buy or sell significantly below/above the prices at the other exchanges. Unless your price closely follows the prices of the other exchanges it would be very easy to make a big profit cycling money back and forth.

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JoelKatz
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August 11, 2011, 02:22:43 AM
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Less information means greater risk.
How is risk introduced into this?
With less information about your market, I cannot predict as effectively how it will move. Since I can't get cash out of your exchange quickly, I risk being stuck with cash that cannot do anything useful. I might be willing to take that additional risk, but not for free.

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I'd say risk is reduced because your orders have a lower chance of moving the market, so your orders will end up costing less.
That's a miniscule risk. The vast majority of orders are not mine. I lose information for every not-mine order and gain for every mine order. I'd have to gain an awful lot on every order of mine to compensate for the much greater order of magnitude of orders that are not mine.

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Since every transaction on your exchange would have higher risk than an otherwise similar transaction on a more open exchange, you'd have to charge lower commissions to get my business.
Let's assume this exchange has no transaction fees for the purpose of this discussion.
Then I might be willing to take the greater risk. It would help a lot if I could get cash out of the exchange quickly too.

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but not being able to see the market I'm trading into harms me quite a bit.
I'd agree if some people had the information and others didn't but since nobody has the market depth then I don't see how it's harmful. Plus I would argue that in an transparent market you don't have all the information either because of trading bots.
Okay, fine, I benefit a tiny bit by hiding my own information from others. But I am harmed much more by not being able to see any other transactions. Keeping other people in the dark about other people's transactions, which I also don't know about, doesn't help me at all.

In sum:

My few transactions: Slight help to me per transaction.
Other people's many transactions: Moderate harm to me per transaction.
Net: Huge harm to me.

I am an employee of Ripple.
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JohnDoe
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August 11, 2011, 03:27:13 AM
 #6

If it wasn't the only exchange in existence, then I'd just try to either buy or sell significantly below/above the prices at the other exchanges. Unless your price closely follows the prices of the other exchanges it would be very easy to make a big profit cycling money back and forth.

Traders already do that in the existing exchanges so I don't see much of a problem with this.

With less information about your market, I cannot predict as effectively how it will move.

My argument is that you are not able to predict movements effectively either in transparent markets because trading bots obfuscate relevant information just like dark pools. They are able to place and remove orders much faster than your ability to process and make decisions on the new information that comes in every second.

Since I can't get cash out of your exchange quickly, I risk being stuck with cash that cannot do anything useful. I might be willing to take that additional risk, but not for free.

If you have urgency in cashing out quickly then you place your order as close to the latest price as it needs to be. It's no different than in normal exchanges.

But I am harmed much more by not being able to see any other transactions. Keeping other people in the dark about other people's transactions, which I also don't know about, doesn't help me at all.

You do see the transactions that occur. What you don't see is the order book.
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August 11, 2011, 03:36:15 AM
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My argument is that you are not able to predict movements effectively either in transparent markets because trading bots obfuscate relevant information just like dark pools. They are able to place and remove orders much faster than your ability to process and make decisions on the new information that comes in every second.
"Other exchanges are almost as bad" doesn't sound like a very good sales pitch. Simply put, you give me much less information. How will you make that up to me? Hiding my own transactions from others is only a microscopic benefit to me.

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Since I can't get cash out of your exchange quickly, I risk being stuck with cash that cannot do anything useful. I might be willing to take that additional risk, but not for free.
If you have urgency in cashing out quickly then you place your order as close to the latest price as it needs to be. It's no different than in normal exchanges.
I think you miss my point. Presumably, if I have bitcoins stuck in your exchange, I can transfer them out instantly. But if I have cash stuck in your exchange, it's going to take me on the order of days to get it out. That's a risk I have to take to sell on your market. I wouldn't take it blind.

I might be willing to transfer some bitcoins to your exchange, try to sell them for well over market price, and wait a half hour. If I succeed, it's worth the few days it'll take me to get the cash back, maybe I'll try to buy way below market price. If I succeed, at least I can get the coins out fast. But I wouldn't be willing to sell at anywhere near market price on such an exchange, since the risk would be too high.

I am an employee of Ripple.
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JohnDoe
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August 11, 2011, 02:39:40 PM
 #8

I think you miss my point. Presumably, if I have bitcoins stuck in your exchange, I can transfer them out instantly. But if I have cash stuck in your exchange, it's going to take me on the order of days to get it out. That's a risk I have to take to sell on your market. I wouldn't take it blind.

I might be willing to transfer some bitcoins to your exchange, try to sell them for well over market price, and wait a half hour. If I succeed, it's worth the few days it'll take me to get the cash back, maybe I'll try to buy way below market price. If I succeed, at least I can get the coins out fast.

Yeah honestly I don't get your point at all. What does this have to do with the exchange being a dark pool? Slow withdrawals can happen in any type of exchange.

But I wouldn't be willing to sell at anywhere near market price on such an exchange, since the risk would be too high.

Still don't get how it's inherently risky to place your orders at whatever price you deem appropriate to fill them in the amount of time that you require. I don't see it any different than in other exchanges.
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August 11, 2011, 03:16:26 PM
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I think you miss my point. Presumably, if I have bitcoins stuck in your exchange, I can transfer them out instantly. But if I have cash stuck in your exchange, it's going to take me on the order of days to get it out. That's a risk I have to take to sell on your market. I wouldn't take it blind.

I might be willing to transfer some bitcoins to your exchange, try to sell them for well over market price, and wait a half hour. If I succeed, it's worth the few days it'll take me to get the cash back, maybe I'll try to buy way below market price. If I succeed, at least I can get the coins out fast.

Yeah honestly I don't get your point at all. What does this have to do with the exchange being a dark pool? Slow withdrawals can happen in any type of exchange.
Right. So putting money into an exchange has a cost -- the money may get stuck there. To commit to an exchange, I'd like as much information as possible. You give me much less than other exchanges do. So how do you make up that loss to me?

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But I wouldn't be willing to sell at anywhere near market price on such an exchange, since the risk would be too high.
Still don't get how it's inherently risky to place your orders at whatever price you deem appropriate to fill them in the amount of time that you require. I don't see it any different than in other exchanges.
The difference is that I'll have less information at your exchange. Information always reduces risk, so less information means more risk. Again, how do you make that up to me? What do I get at your exchange in return for being more blind?

I am an employee of Ripple.
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nighteyes
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August 16, 2011, 02:36:10 AM
 #10

The usual complaint about dark pools is that it makes the market look too thin and therefore not worth it despite the advantages of low volatility and low spreads. So what if the market depth was scrapped entirely to avoid that? No bids and asks, the only information you would have is the trade history and volume. Would such an exchange be viable or would it have some huge disadvantages?

The current dark exchange doesn't have an enforcement mechanism(as I understand it)....or escrow, whatever you want to call it....hehe, welcome to bitcoin. It says the status of the transaction, but cant force someone to send the other money. Adaption is on hold,waiting for the social network. Dont hold your breath on waiting for the social network.

Unless you have some idea on how to eliminate the third party,aka escrow, and  make a case that both sides have to follow through, it wont be competitive against Gox or the others.

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