[UPDATED] MTGox and dark pool

[killerstorm]

That was the original idea. However the result is not exactly what was expected... maybe? (hard to tell what would have happened without the dark pool)

Is there some statistics on volume of transactions in dark pool vs normal transactions?

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[imanikin]

Whenever possible, for reasons i've stated in numerous ways in other threads, i will avoid dealing on Mt Gox again, as long as the dark pool exists there...  

[S3052]

I voted for 'keep it as is'. I believe that most of dark pool haters don't really understand what DP is and they are simply scared by unknowns.

Writing custom bots for trading large amounts is ugly workaround, DP solve that nicely. I simply don't see the reason why to remove it.

Disclaimer: I didn't used DP yet, so I'm not following my own interests .

Edit: OK, I see one reason why DP is bad - market then looks thinner and people are affraid of trading because it looks like trade will be filled for worse price.

Agree 100%.

Stopping dark pool will in all likelyhood increase the spreads = making buying and selling bitcoins more expensive for most people.

[ColdHardMetal]

As near as I can tell after having thought about this for awhile a dark pool will never hurt you pricewise. Assuming the dark pool is inside the visible spread you'll always get to buy at a lower price or sell at a higher price than you expected. The only real problem is the lack of visibility in terms of the depth of market as mentioned above.

With that thought in mind would it make sense to incorporate a "dark depth" number or something that tells you the depth of the market between the spread but doesn't tell you the prices? Or would that just make a dark pool useless?

[Grinder]

I voted remove it, because I think a higher volume would make people take bitcoins more seriously.

[Keefe]

What exactly does "moving the market" means? Means that these dark trades won't affect the price of  the BTC?

They will ultimately affect the price of the BTC through demand/supply rules. But there will significantly less immediate effect on the market comparing to normal, visible order, so this helps to combat short-term volatility.

Please check depth of market and megachart on mtgox to see what we're talking about (http://mtgox.com/trade/history).

Now to see how it works, consider that you want to buy a lot of USD for BTC. Let's say 5000 BTC which is more or comparable to sum of current bids.

If you'll try to buy it at market price going through current bids starting from highest you will fill a lot of bids and thus drive the highest bid down. So it is not a very good idea. Even you do this gradually, still highest bid will decrease over time from your activity, people will notice this and will put both their bids and asks lower, thus you're losing again.

If you do not want to buy at a huge premium you can try to buy at fixed price. Let's say lowest current ask is 0.79. Then you can put your ask at 0.78. Then, in theory, people who sell at market price will eventually fill your order without driving price down.

But the problem is that others see your ask order and its size and they will anticipate drop in price of BTC through demand/supply balance. Besides that there are other people who want to buy and they will try to put their asks lower than yours, e.g. 0.7799 < 0.78 to get their orders filled before yours by market orders. (As there is no chance that anybody can buy at better price in near future.)

Thus again, price is going down and you're not buying anything until some huge-ass sell order will appear.

Dark orders are kind of solution to this problem -- you're still buying something but people do not see your orders so they cannot anticipate whether market goes up/down before you do.

In dark+normal situation it is like a normal order but it is invisible. People will see that something happens -- ask orders are not filled at market, or are not filled as fast as they should, but they will not know what is your price and how much volume is left. So they cannot anticipate drop in price and drop it before that.

With dark-only situation you'll be trading among other dark-poolers (people with huge orders). So it will be invisible to normal market, but affect it because there are less volume flowing through it. Dark-poolers will probably use current market price as a reference for their orders.

So this stuff is unnecessary if there is huge volume in trading and so individual orders do not move market much. But it looks like it is not a case with bitcoin exchanges so far because there are different players with different capacities.

FWIW, I think you have bids and asks confused. EDIT: My mistake. I didn't catch that you were talking about buying USD and *selling* BTC.

Current bids on the order book (Depth of Market) represent other buyers waiting for sellers, and asks represent sellers waiting for buyers. When you want to buy immediately, you clear/fill asks, driving up the best/lowest ask. When you want to sell immediately, you clear/fill bids, driving down the best/highest bid.

Dark-only orders don't directly affect the visible bids or asks, nor any normal orders.

Dark+normal bids support (hold up) the price invisibly, absorbing immediate sells without showing that they are going to do so, nor how strongly. When they are filled partially or fully, the trades do show in the trade feeds (such as the #bitcoin-market irc channel), so one can see the effect of their existence. Dark+normal asks provide invisible resistance (holding the price down) in a similar manner.

[Jered Kenna (TradeHill)]

I think it hurts the appearance of legitimacy.  I understand why they're there and why they should work and because of that I'm not 100% decided.
I also realize bots are basically going to be doing the same thing.
I'm curious how much trading is being done DP vs in the open? Is it a 50/50 split or really tilted one way?
I think we would all like to see more volume and I don't think DP really goes with the openness of bitcoin.

I'm voting no but to be honest I'm not 100% sure what is best.

[killerstorm]

FWIW, I think you have bids and asks confused.

Current bids on the order book (Depth of Market) represent other buyers waiting for sellers, and asks represent sellers waiting for buyers. When you want to buy immediately, you clear/fill asks, driving up the best/lowest ask. When you want to sell immediately, you clear/fill bids, driving down the best/highest bid.

Yep, you're right. But it doesn't matter much if we're talking about currency exchange -- if one sells bitcoin you can as well say he is buying USD and vice-versa.

[Keefe]

FWIW, I think you have bids and asks confused.

Current bids on the order book (Depth of Market) represent other buyers waiting for sellers, and asks represent sellers waiting for buyers. When you want to buy immediately, you clear/fill asks, driving up the best/lowest ask. When you want to sell immediately, you clear/fill bids, driving down the best/highest bid.

Yep, you're right. But it doesn't matter much if we're talking about currency exchange -- if one sells bitcoin you can as well say he is buying USD and vice-versa.

I apologize. I didn't catch that when you said buy, you were actually referring to selling BTC and buying USD. Given that at MtGox the term Buy refers to buying BTC, it might be best to follow that convention so as to not confuse someone possibly less experienced with currency trading.

[slush]

I voted remove it, because I think a higher volume would make people take bitcoins more seriously.

DP does not affect volume; historical volume shows also DP trades. So that's not good reason for disabling DP.

[Grinder]

DP does not affect volume; historical volume shows also DP trades. So that's not good reason for disabling DP.

Then there haven't been any DP trades the last 24 hours, so I suppose it wouldn't make very much difference if they were open.

[S3052]

I voted remove it, because I think a higher volume would make people take bitcoins more seriously.

You are wrong here.
The dark pool trades are all part of all the trades you see on bitcoincharts.com

hence, only the dark trade offers are invisible, while the resulting trades are treated in the same way as other orders. Net, dark pool do not mask any volume.

This is based on what I heard from the owners of MtGox. If this is confirmed, dark pools have only positives.

[S3052]

DP does not affect volume; historical volume shows also DP trades. So that's not good reason for disabling DP.

Then there haven't been any DP trades the last 24 hours, so I suppose it wouldn't make very much difference if they were open.

No, you're not getting it yet.

All trades, no matter of dark pools only, dark pools + normal and normal only are visible. You can ask the exchange owner if they can provide you with an analysis how much % of the last 24 h trades were ingnited by dark orders.

[Psychoactive]

I like the idea of charging a fee

Either you have dark pools free and available to anyone, eg.  don't limit to 1000BTC/$ +
Or don't have them at all.

Voted to remove it. But I understand bots are able to emulate the same behaviour as dark pools so... In all cases, I agree with da2ce7, if you keep it, it should be open to every trader, rather than limited to 1000btc+.

[jed]

imanikin: can you point to the threads explaining what you don't like about the DP?

The DP definitely reduces volatility. It is hard to buy a sell a lot of BTC otherwise.

The only other complaint I've heard about it is that it makes it hard for speculators to know how much they will move the market with an order. But the only reason to worry about this is if you want to do tricky things like dump a bunch of BTC to lower the price and then buy it back plus some. But I'm not sure this is such a bad thing.

I tend to think it is fine how it is but the limit should be raised so it is really just very large orders.

[imanikin]

imanikin: can you point to the threads explaining what you don't like about the DP?

I think a lot of the pros and cons, including mine, were covered in this thread:

http://bitcointalk.org/index.php?topic=3772.0

[mndrix]

I voted "keep it as is".  Because bots can simulate dark pools, removing dark pools doesn't really change the market any.  It just creates a slight barrier to entry for dark pool use. (Although I suppose bots do surface the "tip of the iceberg", so the book might look healthier without official dark pool support).

[jed]

imanikin: I get your point that dark pools seem like an unfair advantage to bigger investors. But I would argue that the market has a very different reaction to when a big investor places an order than to when a small one does. For example, if a small investor places a bid for 50BTC above all the others there will probably be 0 reaction. But if a big investor places a bid for 5000BTC above all the others the market definitely reacts. Specifically tons of people jump in front of his order.  Probably his order is never filled since the price will just move above it.

There is also the unfair fact that 1 big trader is more valuable to the market than 1 small one since a big trader provides more liquidity. So an exchange has more incentive to keep the big guys happy.
 
I'm actually a bit curious what would happen if the order book wasn't shown at all. I suppose it would make trading less interesting. 

[Stephen Gornick]

For example, if a small investor places a bid for 50BTC above all the others there will probably be 0 reaction.

That's not what I've seen.  When I want to do a trade but only if the order is filled at about the current best offer, I'll jump in front of the current best offer by a tiny amount.  Then often a bot or another trader will often jump in front of mine.

When Mt. Gox supported websockets, this tool http://www.thenewsh.com/~newsham/x/mtgox/ showed the bots in action.  It was quite entertaining watching that display when another bot or another trader would walk the first bot higher or lower and then snag an order at a better price.

As far as offering a dark pool, I'm in favor.  There are numerous tools used in finance.  I don't know why we would want to hobble Bitcoin by discouraging the use of one of the more valuable tools.

[cypherdoc]

you should get rid of the dark pool.  it is inherently breeds suspicion and contributes to mkt obscuration.  as one who trades stocks i can tell you it is just part of the Wall St corruption/fraud scandal.