What if bitcoins were used in high-frequency trading?

[jgarzik]

Stock is only useful if honored by the company management. If you have to trust them (which you do) they might as well just maintain the share register (which is exactly how it currently works, although most companies outsource the maintenance of the database).

There's no point in using a complicated proof-of-work system to maintain a simple spreadsheet when at the end of the day you're effectively just going to print off a copy and hand it to someone and just trust that they do whatever it says. They might as well maintain it centrally as it's much simpler. There's no value add for this huge p2p network crunching thousands of Ghash/s when at the end of the day someone can just ignore it.

And?  At the end of the day, a human can ignore my bitcoins.  At the end of the day, a company can ignore my Charles Schwab stock purchase.  All they are are ones and zeroes in a computer, just like those dollars my bank claims I possess.

A distributed, notarized database of digital tokens has a large number of uses that may extend directly into real world goods.  It is readily apparent that value exists in a neutral, distributed entity maintaining a database rather than a single entity (== single point of failure).

The only reason the bitcoin network works for bitcoins is there are no external trust dependencies. That won't be true in the case of any of the physical goods trading you described.

Not true at all.  Bitcoins would have zero value, if you could not trade them for real-world goods, services and currencies.  People trust that the value of their bitcoins will be there tomorrow.  That is the mother of all external trust dependencies.

[1713826467]

1713826467

[1713826467]

1713826467

[1713826467]

1713826467

[MacRohard]

Stock is only useful if honored by the company management. If you have to trust them (which you do) they might as well just maintain the share register (which is exactly how it currently works, although most companies outsource the maintenance of the database).

There's no point in using a complicated proof-of-work system to maintain a simple spreadsheet when at the end of the day you're effectively just going to print off a copy and hand it to someone and just trust that they do whatever it says. They might as well maintain it centrally as it's much simpler. There's no value add for this huge p2p network crunching thousands of Ghash/s when at the end of the day someone can just ignore it.

And?  At the end of the day, a human can ignore my bitcoins.  At the end of the day, a company can ignore my Charles Schwab stock purchase.  All they are are ones and zeroes in a computer, just like those dollars my bank claims I possess.

A distributed, notarized database of digital tokens has a large number of uses that may extend directly into real world goods.  It is readily apparent that value exists in a neutral, distributed entity maintaining a database rather than a single entity (== single point of failure).

The only reason the bitcoin network works for bitcoins is there are no external trust dependencies. That won't be true in the case of any of the physical goods trading you described.

Not true at all.  Bitcoins would have zero value, if you could not trade them for real-world goods, services and currencies.  People trust that the value of their bitcoins will be there tomorrow.  That is the mother of all external trust dependencies.

And you miss the point yet again. I think I've explained what I meant fairly well already so I'll probably just give up now.

A human could ignore your bitcoins.. for example they could buy some from you and then not do anythin with them. I think you'll agree that isn't really your problem. If you buy something from them using bitcoins and they ignore your request for goods and keep the bitcoins then they're a dishonest trader, and you lose out - but that doesn't affect the rest of the market. There are other honest traders out there that you can deal with.

The difference is, in that situation it's just a bad trader, in the other situation the entire market has to be cleared by a central authority - the corn dealer or company management. If they turn out to be a bad trader the entire market is invalid and it doesn't matter what system you used to record who owns what, because nobody owns anything because the guy that's supposed to ultimately give it to everyone has ripped you all off. Similarly if the guy is honest, it doesn't matter how he records who he owes what too. It could be a block chain, but it could just be a free spreadsheet in google apps.

There probably are some other uses of proof-of-work distributed block databases, just not the ones that you've presented so far.

[Anonymous]

Sure I would mine your block chain as long as you paid me 50 bitcoins for each block I solved on your chain

If a sufficiently large company wanted to they could buy enough bitcoins to cover paying them to miners to ensure their chain was strong and miners could shop around for weaker block chains to support to earn more bitcoins for themselves.

A marketplace for miners would spring up where they advertise the hashing power they bring to the table and companies could buy it in bitcoins.

Essentially miners become security and companies could advertise the amount of hashing power backing their chain. Such security would be verifiable.

If the accepted payment for these competing chains was bitcoin wouldn't that create a massive demand for the main bitcoin currency  ?

[nanotube]

BitDNS is a different matter.. with DNS there is something that can be delivered electronically where the thing itself is stored in the blockchain. This would work.. but you don't really need the whole proof of work thing. If all you want is a first-come-first-served name grabbing model that is basically just a simple distributed database where the p2p swarm stores the zonefile and accepts updates from keyholders and allows new registrations where the name doesn't already exist. I don't see a role for proof-of-works here. Double spending doesn't really exist.. I guess the analogy would be if you tried to transfer (sign away to a new controlling private key) the same domain name to two different new owners.. how much of a problem would that be? Is it really worth doing proofs of work to stop it? Maybe.. but I'm not really convinced. With coins you can doublespend them to anyone.. with a domain name you'd have to find two people who wanted to buy the exact same domain from you at the same time. The motivation for fraud is significantly lower.

in bitdns land, a 'double spend' would be someone trying to register a domain that has already been registered.
the bitcoin chain is not just a distributed database, but also distributed timestamping service. if there's no block chain... how do you know that person1 registered the domain before person2? in bitcoinland, the sequence of blocks is the 'timeline'.

[jgarzik]

The difference is, in that situation it's just a bad trader, in the other situation the entire market has to be cleared by a central authority - the corn dealer or company management. If they turn out to be a bad trader the entire market is invalid and it doesn't matter what system[...]

If the "entire market" is a single corn dealer or one lone public company, that may be true.  But that's a dumb way to set up a stock system anyway (strawman?).  No one in their right minds would want a block chain for every company on NASDAQ -- over 2,000 block chains for that one market.

The bitcoin decentralized notary system would be well suited, however, to the task of transferring shares of stock for multiple companies, between untrusted parties.

[marcus_of_augustus]

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

Bitcoin could do with as many exchanges and market makers as are willing to have a go ...

... especially a market maker that could have multiple exchanges in diverse locations dealing in separate currencies.

Consider the utility and desirability of a single trusted exchange entity whereby a local cash or electronic bank transfer (EFT), in say Germany, France, Switzerland or U.K. can be made to acquire Bitcoins and then using an agent of the same trusted exchange partner located in another country say USA, Canada, Hong Kong or Australia can be used for a Bitcoin to cash or for local EFT.

[QuantPlus]

A market maker would be nice.  In my limited experience, the volumes are still too low for it to be profitable though.

I've been a bond MM for 15 years, small hedge fund...
Right now the $0.03 spread is nice (0.73 - 0.76)...
But an MM might make 50% of that...
So with 12,000 volume last 24 hours...
The total potential net for an MM might be $200/day (a pittance).

But people are also making directional bets on this...
Like that UK guy selling fixed payout contracts must be making a bullish bet.

Also the market is being manipulated and gamed...
Which is par for the course at this stage...
And, after all, no one is forcing you to trade BT.

If total size goes 100x from $5 mm to $500 mm...
Small Market Makers will come out of the woodwork...
And that USD spread will be < $0.01...
Trading is >> 90% automated these days...
It would take only days or weeks to adapt forex software for BT.

[matonis]

A market maker would be nice.  In my limited experience, the volumes are still too low for it to be profitable though.

If total size goes 100x from $5 mm to $500 mm...
Small Market Makers will come out of the woodwork...
And that USD spread will be < $0.01...
Trading is >> 90% automated these days...
It would take only days or weeks to adapt forex software for BT.

Volumes will increase. True, it would only take a few days to adapt forex software for BTC, but clearing and settlement from/into national currencies is where it touches the "KYC" anti-money laundering world, including OECD/FATF and Fincen.

[Mike Hearn]

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?

In a private email exchange some time ago, Satoshi had the following to say about HFT:

I haven't fully understood why sequence numbers are a property of the tx inputs rather than the tx itself.

It's for contracts.  An unrecorded open transaction can keep being replaced until nLockTime.  It may contain payments by multiple parties.  Each input owner signs their input.  For a new version to be written, each must sign a higher sequence number (see IsNewerThan).  By signing, an input owner says "I agree to put my money in, if everyone puts their money in and the outputs are this."  There are other options in SignatureHash such as SIGHASH_SINGLE which means "I agree, as long as this one output (i.e. mine) is what I want, I don't care what you do with the other outputs.".  If that's written with a high nSequenceNumber, the party can bow out of the negotiation except for that one stipulation, or sign SIGHASH_NONE and bow out completely.

The parties could create a pre-agreed default option by creating a higher nSequenceNumber tx using OP_CHECKMULTISIG that requires a subset of parties to sign to complete the signature.  The parties hold this tx in reserve and if need be, pass it around until it has enough signatures.

One use of nLockTime is high frequency trades between a set of parties.  They can keep updating a tx by unanimous agreement.  The party giving money would be the first to sign the next version.  If one party stops agreeing to changes, then the last state will be recorded at nLockTime.  If desired, a default transaction can be prepared after each version so n-1 parties can push an unresponsive party out.  Intermediate transactions do not need to be broadcast.  Only the final outcome gets recorded by the network.  Just before nLockTime, the parties and a few witness nodes broadcast the highest sequence tx they saw.

The nLockTime feature is not used in BitCoin today. However it is apparent that Satoshi considered this use case ahead of time, as he did with so many others.

[eMansipater]

Satoshi is such a genius.

[gigabytecoin]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

PayPal is a layer on top of bitcoin.

Bitcoin will be a success when PayPal-BTC currency is offered alongside PayPal-USD and PayPal-EUR.

Agreed.

PayPal is a payment processor. Bitcoin is a currency.

[crispy]

Bitcoin could do with as many exchanges and market makers as are willing to have a go ...

Definitely.  Let them be as ubiquitous as coffee shops. 

There are already some open source projects for exchanges: Bitcoin-central and Intersango are two that I'm aware of.

[Phinnaeus Gage]

How did a Newbie, with only 1 post (and still has only one post), get to post here? ...whick has over 50 comments and yet to add more to the discussion?

Great post, BTW!

[TraderTimm]

High Frequency Trading is market cancer.

Quote-stuffing algorithms which have been exposed by firms such as NANEX, show alarming patterns of bid/offer running, pulling orders after using their algos to 'ping' what is in the order book. This results in 'vapor liquidity' as none of the orders put in the book for the thinnest of timeslices is actually intended to fill.

Woe unto the exchange that allows these parasites into their API's. The last thing we need is some "ghost liquidity" from algos that get pulled when all bids disappear.

[crispy]

Wonder if a nominal charge for quotes, orders, and/or cancels, on the order of a few Satoshi or so would counteract the harmful effects.