How profitable are exchanges?

[JorgeStolfi]

Similarly, if two exchanges agree to show their order books to each other, a couple of seconds before they are posted to the public, they can exploit all opportunities for arbitrage between them.  Any client who tries to do arbitrage will then find that the prices have always shifted against him between the time that he places an order and the time that it gets executed.

Easy for an experienced trader to detect this, as they watch the price on multiple exchanges at the same time.

How exactly?  To the people watching the logs, those insider trades would be indistinguishable from normal trades.

Without the insider trades, an outsider would occasionally see a difference in price lasting long enough for him to exploit.  With insider trades, there would be fewer such opportunities; and when one appears, before the client can execute his trade there would appear another trade exploiting the difference and eliminating it.

Specifically, for example: the outsider sees that on exchange A the highest bid is 450$, on exchange B the lowest ask is 440$. He submits a buy order on B for 440$, but before it gets executed, someone else buys that offer; his own order just lands on the book, unfilled, while the lowest ask on B has jumped to 455$.  How can he tell that the buy that succeeded was insider arbitrage, rather than a normal trade at B, or A-B arbitrage by a luckier competitor?

[BitCoinNutJob]

I seem to recall the guy who owns mcxnow in chat saying he made about $30,000 profit per month.  He would make more but spends alot to keep the site running smooth/new features etc.  This was before he scammed people with the fee shares. Im assuming he now makes less money.

[DubFX]

They are hella profitable even when fee is lower than 1% fees have always been big (bigest?) bussnies for every company/service.

exchanges are most profitable if they steal their customers money and dont get caught

They could make way more if they could keep their exchange funcional and safe and most of the time regular income is way better than one time big income.

[arbitrage001]

Similarly, if two exchanges agree to show their order books to each other, a couple of seconds before they are posted to the public, they can exploit all opportunities for arbitrage between them.  Any client who tries to do arbitrage will then find that the prices have always shifted against him between the time that he places an order and the time that it gets executed.

Easy for an experienced trader to detect this, as they watch the price on multiple exchanges at the same time.

How exactly?  To the people watching the logs, those insider trades would be indistinguishable from normal trades.

Without the insider trades, an outsider would occasionally see a difference in price lasting long enough for him to exploit.  With insider trades, there would be fewer such opportunities; and when one appears, before the client can execute his trade there would appear another trade exploiting the difference and eliminating it.

Specifically, for example: the outsider sees that on exchange A the highest bid is 450$, on exchange B the lowest ask is 440$. He submits a buy order on B for 440$, but before it gets executed, someone else buys that offer; his own order just lands on the book, unfilled, while the lowest ask on B has jumped to 455$.  How can he tell that the buy that succeeded was insider arbitrage, rather than a normal trade at B, or A-B arbitrage by a luckier competitor?

Insider arbitrage is fine in my book. They are providing liquidity and market participants are benefiting by having their order filled at limit price.

The cost of moving money from one exchange to another exchange isn't free nor cheap nor convenient. If the exchange is providing this service because they can move larger quantity of money at fix cost, then they are adding benefit to both the exchange and all users on the exchange.

 

[BitCoinDream]

MCXNow, Crypsy, BTCT, BTC-E?

I'm conducting a survey to determine the actual profitability of the popular exchanges.

Does anyone have any idea of what the volume is for these exchanges? What these exchanges make weekly or monthly and how we could find out?

I wish there were a poll in the survey

[Harley997]

Similarly, if two exchanges agree to show their order books to each other, a couple of seconds before they are posted to the public, they can exploit all opportunities for arbitrage between them.  Any client who tries to do arbitrage will then find that the prices have always shifted against him between the time that he places an order and the time that it gets executed.

Easy for an experienced trader to detect this, as they watch the price on multiple exchanges at the same time.

How exactly?  To the people watching the logs, those insider trades would be indistinguishable from normal trades.

Without the insider trades, an outsider would occasionally see a difference in price lasting long enough for him to exploit.  With insider trades, there would be fewer such opportunities; and when one appears, before the client can execute his trade there would appear another trade exploiting the difference and eliminating it.

Specifically, for example: the outsider sees that on exchange A the highest bid is 450$, on exchange B the lowest ask is 440$. He submits a buy order on B for 440$, but before it gets executed, someone else buys that offer; his own order just lands on the book, unfilled, while the lowest ask on B has jumped to 455$.  How can he tell that the buy that succeeded was insider arbitrage, rather than a normal trade at B, or A-B arbitrage by a luckier competitor?

Insider arbitrage is fine in my book. They are providing liquidity and market participants are benefiting by having their order filled at limit price.

The cost of moving money from one exchange to another exchange isn't free nor cheap nor convenient. If the exchange is providing this service because they can move larger quantity of money at fix cost, then they are adding benefit to both the exchange and all users on the exchange.

I wouldn't even call it insider arbitrage myself. It would really just be exchange operators not needing to wait for confirmations when depositing btc into their own exchange.

As long as exchange operators are not doing anything to depress/increase the price of bitcoin on their specific exchange in the way of news/policies this would be fine. 

[JorgeStolfi]

Insider arbitrage is fine in my book. They are providing liquidity and market participants are benefiting by having their order filled at limit price.

Any money that the arbitrager makes comes out of other clients' pockets.  So if the exchange owners do arbitrage and collude to peek at each other's books before other clients, they are taking unfair advantage of them.

An arbitrager essentially merges the order book of some other exchange A into the exchange B where you are trading.  However, while doing so, he raises some of the asks and lowers some of the bids; in such a way that, when you trade into those "transported" orders, you pay more or earn less than you would if you were trading on exchange A.  These differences are pocketed by the arbitrager.

The cost of moving money from one exchange to another exchange isn't free nor cheap nor convenient.

Arbitrage does not require moving national money across exchanges.  If one has suitable reserves or money and coins on each exchange, one can keep all four accounts balanced (and steadily increasing) by moving bitcoins only between the exchanges and adjusting the amounts bought and sold on each side.  Moreover, such rebalancing is necessary only if the traders are grossly unbalanced, e.g. if the price is steadily rising and one exchange is consistently behind the other.  If the price is going up and down at random, one expects that the accounts will tend to stay nearly balanced just by statistical cancellation.

[ShakyhandsBTCer]

They quietly make big money, just like pokerstars who takes a rake off of each pot that is played in poker. 

Want to elaborate a little on this?

Mostly these sites are badly managed, we have seen it with Gox and more will unfortunately follow...

I think it was just MtGox that was especially badly managed. Other exchanges have not had anywhere near the levels of problems that gox had

[JorgeStolfi]

PS. I must point out that I am not a trader, so figuring out ways in which exchange owners could cheat on their clients is merely a curious puzzle for me.  Exchange owners have much stronger motivations, so they surely will find much "better "solutions to that puzzle.

One way to find such solutions in to read the laws and SEC regulations that apply to the operation of ordinary stock exchanges.  Every practice that is prohibited by them must be a proven way to unfairly take money from customers; so one can bet that the bitcoin exchange owners are doing it. 

[scryptasicminer]

Insider arbitrage is fine in my book. They are providing liquidity and market participants are benefiting by having their order filled at limit price.

Any money that the arbitrager makes comes out of other clients' pockets.  So if the exchange owners do arbitrage and collude to peek at each other's books before other clients, they are taking unfair advantage of them.

An arbitrager essentially merges the order book of some other exchange A into the exchange B where you are trading.  However, while doing so, he raises some of the asks and lowers some of the bids; in such a way that, when you trade into those "transported" orders, you pay more or earn less than you would if you were trading on exchange A.  These differences are pocketed by the arbitrager.

The cost of moving money from one exchange to another exchange isn't free nor cheap nor convenient.

Arbitrage does not require moving national money across exchanges.  If one has suitable reserves or money and coins on each exchange, one can keep all four accounts balanced (and steadily increasing) by moving bitcoins only between the exchanges and adjusting the amounts bought and sold on each side.  Moreover, such rebalancing is necessary only if the traders are grossly unbalanced, e.g. if the price is steadily rising and one exchange is consistently behind the other.  If the price is going up and down at random, one expects that the accounts will tend to stay nearly balanced just by statistical cancellation.

Meeting market demand while at the same time making some profit is not the same as front running or queue jumping order book. The order on order book uses limit order, so customers are not paying higher price than they want.

Normally, some exchange will have consistently lower price or higher price due to trust, deposit fee, trading fee, and etc. So keeping account balance on two or more exchanges at the same time isn't really possible.


To cheat on customers, there are other simple way. Such as artificially crediting their own account with bitcoin or fiat and do directional bet using customer money.

[bryant.coleman]

I don't know about the other exchanges, but monthly revenue for BTC-E is somewhere in the range of BTC2,000. That means around $1.2 million per month and $15 million per year. Don't know the net income.

That is huge profit for an exchange. No wonder no major exchange want to offer equity.

Right now I don't think that will be a good idea. 99% of the world population don't know about Bitcoin. The exchange rate and adoption will increase logarithmically in the coming few years. Once that happens, they can list the exchanges in NASDAQ or some other stock market.

[peeveepee]

I don't know about the other exchanges, but monthly revenue for BTC-E is somewhere in the range of BTC2,000. That means around $1.2 million per month and $15 million per year. Don't know the net income.

That is huge profit for an exchange. No wonder no major exchange want to offer equity.

Right now I don't think that will be a good idea. 99% of the world population don't know about Bitcoin. The exchange rate and adoption will increase logarithmically in the coming few years. Once that happens, they can list the exchanges in NASDAQ or some other stock market.

Self defeating to be listed on stock exchange.

Hoarding will kill the adaptation and usage. And people can choose another coin for usage.

[InwardContour]

I don't know about the other exchanges, but monthly revenue for BTC-E is somewhere in the range of BTC2,000. That means around $1.2 million per month and $15 million per year. Don't know the net income.

That is huge profit for an exchange. No wonder no major exchange want to offer equity.

Right now I don't think that will be a good idea. 99% of the world population don't know about Bitcoin. The exchange rate and adoption will increase logarithmically in the coming few years. Once that happens, they can list the exchanges in NASDAQ or some other stock market.

It does not matter if a currency is listed on a stockmarket.

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

[arbitrage001]

I don't know about the other exchanges, but monthly revenue for BTC-E is somewhere in the range of BTC2,000. That means around $1.2 million per month and $15 million per year. Don't know the net income.

That is huge profit for an exchange. No wonder no major exchange want to offer equity.

Right now I don't think that will be a good idea. 99% of the world population don't know about Bitcoin. The exchange rate and adoption will increase logarithmically in the coming few years. Once that happens, they can list the exchanges in NASDAQ or some other stock market.

It does not matter if a currency is listed on a stockmarket.

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

Why would citizen of emerging market will choose bitcoin vs their own currency?

[KimNam]

sure that big exchanges will very profitable
since many of traders trading there, and they get coin from trading fee
i am interested from where chinese exchange who doesn't add trading fee get income?

Once citizens of emerging markets start to use bitcoin then it can reach it's potential.

Why would citizen of emerging market will choose bitcoin vs their own currency?

maybe because their national currency was inflated
inflation will make they choose bitcoin instead their own currency

[Benjig]

The profit of the exchanges is easily calculated by their daily volume, and as every exchange take only a little part of every trade as fee, you can deduct that from the whole volume.
Regards

ANXPRO

[JorgeStolfi]

maybe because their national currency was inflated
inflation will make they choose bitcoin instead their own currency

Bitcoin price just fell 30$ (5%) in the last 24 hours. 

Can we please stop this nonsense of bitcoin being a hedge against inflation?  It is deceptive advertising...

Let's save that claim for the future, if and when there will be no more risk of the price drpping again like that.

[JorgeStolfi]

The profit of the exchanges is easily calculated by their daily volume, and as every exchange take only a little part of every trade as fee, you can deduct that from the whole volume.
Regards

ANXPRO

That is the MINIMUM revenue (profit is revenue minus expenses, harder to guess).
Bitcoin exchanges can profit in many other ways, that are illegal for stock exchanges.
The Chinese exchanges have zero trading fees, but seem to be very profitable.

[ShakyhandsBTCer]

The profit of the exchanges is easily calculated by their daily volume, and as every exchange take only a little part of every trade as fee, you can deduct that from the whole volume.
Regards

ANXPRO

That is the MINIMUM revenue (profit is revenue minus expenses, harder to guess).
Bitcoin exchanges can profit in many other ways, that are illegal for stock exchanges.
The Chinese exchanges have zero trading fees, but seem to be very profitable.

This would be the higher end of the revenue potential for most exchanges. Most major exchanges do not charge fees above cost for "bank" related fees.

What makes you say that chinese exchanges are profitable? Couldn't they simply be well funded?

[JorgeStolfi]

What makes you say that chinese exchanges are profitable? Couldn't they simply be well funded?

For one thing, the fact that there are many of them.  Entrepreneurs do not rush to open businesses that are not profitable.

For another, that they have large fancy offices in prime locations, with many staff (Huobi had 50, IIRC). Either Huobi or OKCoin moved to larger offices some months ago.

Finally, they are indeed well-funded, but why would anyone invest in them (10 million US$ just in one of them, IIRC) if they were not profitable?

There are many laws that strictly forbid operators of ordinary stock exchanges from profiting by exploiting their privileged position -- namely, their knowledge of the order book before it is posted to the public -- to trade against their clients.  Those laws do not apply to bitcoin exchanges.  Why would the owners not do those things, if they are legal for them?