Bitcoinica: How it works

[mjcmurfy]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side 

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

+111

[zhoutong]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side  

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

Basically no one can really control the outcome. The free market chooses the better option in case of different needs. If there are people willing to pay for margin trading, it could exist for the common good. (Unless you argue about the potential negative externalities of margin trading, which will be a totally different thing.)

Margin trading should exist in the Bitcoin world, because either
- it's good for everyone, or
- it's tragedy of the commons.

Either way, we can do nothing about it.

To me, the most appealing feature of Bitcoin is the deregulation of money. Uptick rule is a typical regulation to protect some investors' interest while causing unintended consequences which are against the free market spirit. Also, in mature markets, research has found very insignificant link between rate of price decline and imposition of uptick rule. (I wanted to find citations for this, but SSRN is not available at the moment. FYI, Alexander, Gordon J.; Mark A. Peterson (2006-03-15). (How) Does the Uptick Rule Constrain Short Selling?. Social Science Research Network. SSRN 891478. Working Paper Series)

[Mushoz]

My apologies. I guess I was wrong on the "hedge before trade" part. Looking back, it does make sense now, as Bitcoinica is guaranteeing liquidity up to 50BTC, which would be impossible if they indeed used a "Hedge before trade" system. I must have misinterpreted Zhoutong's post on the first page. This indeed makes cypherdoc's concerns on slippage valid, but thankfully Zhoutong seems to have solutions to greatly reduce those kind of risks.

The fist and best solution is what they have already implemented, which is to work with X BTC blocks (In their case 50BTC) max. Even with huge slippage their losses shouldn't be hard to cover because it's only going to be over one or a couple of 50BTC blocks on huge movements, instead of over potentially huge trades.

Their second solution is risk analysis using extreme simulations, to see at what kind of risks those extreme situation brings them. If they can cope even with the greatest movements, as they seem to have analyzed looking at Zhoutong's post (a spike to $9648.84556 BTC/USD prices), combined with 50BTC blocks max, we can be certain they can deal with the risks they are exposing themselves to. You have to remember it's not bad if Bitcoinica turns in a loss over a small time period due to the risks, as long as they turn in profits over the long run.

This leaves the slippage problem on forced liquidations, which could indeed be disastrous if all goes wrong. But thankfully this has already been discussed in this topic, and thankfully Zhoutong listened to my advice in the topic start. He is going to create a new algorithm which gives liquidating short positions priority over going long by preventing more longs _before_ they run out of USD reserves, so that they always have reserves left to allow people to liquidate. Of course the same is going to be true in reverse for liquidating long positions and going short. Prevent more shorts _before_ they run out of BTC, so that people can still liquidate their longs.

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

[zhoutong]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Zhou:  i watch the stock mkt most days minute by minute and am able to witness most major moves.  Mushoz is right; just b/c you haven't seen it happen before with Bitcoin doesn't mean it won't ever happen.  its impossible to write the perfect algorithm.

for example, i predict that as the market becomes larger and bigger players enter the scene with larger and more powerful bots or servers, they will intentionally examine your protocols and try to exploit it with surprise attacks.  what would a 10 minute straight up move in the price do to your algorithm and your customers holding short?  i have seen straight up moves (with a few red candles thrown in btwn) for hours on end clearly designed to destroy shorts as well as the vice versa.

btw, remember 10 days ago when we broke out of the 3.20 range up to 3.70 and then started to drift back down to 3.50 as the sellers and shorts stepped back in?  it was me who jammed the price to 3.99 knowing that it would cause all the other bots and shorts to climb on board and take it up and through 4.00 due to the intensity of the move and the "double ramp".  i believe we topped just over 4.50 on gox with your algorithm spiking to 4.95 or something ridiculous wiping out "a lot, seriously" of leveraged traders (using your own words from the Zhoutonged thread).  i understand that you had to reverse alot of these trades. now this wasn't a target against you or your shorts but it was a consideration given that i saw we were breaking out yet again and i was in the process of accumulating.  and i'm just a guy with a laptop and some intuition.

so in a sense, i do have experience trading on Bitcoinica via watching the effects of what i do on your algorithm.  the lesson for you is, you will always be vulnerable to unpredictable situations.

edit:  no offense but you often come across as being so smart as to be able to write the perfect algorithm.  perhaps its b/c of your young age which i admire more than anything.  but think about it from an open source perspective.  you are one guy trying to outsmart the "market" which is essentially the entire world expressing its opinion of the price.  within that market are all sorts of smart competitors who will try to compete with you.  they will study you and design even better more powerful algorithms.  never take anything for granted.

[smickles]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side 

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

What do you think about Bitcoin redeemable MtGox codes? those seem strikingly similar to "paper" bitcoins.

[Mushoz]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side 

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

What do you think about Bitcoin redeemable MtGox codes? those seem strikingly similar to "paper" bitcoins.

Those are 100% backed by Bitcoins though. Or in the case of USD redeemable codes 100% backed by USD.

[smickles]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side 

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

What do you think about Bitcoin redeemable MtGox codes? those seem strikingly similar to "paper" bitcoins.

Those are 100% backed by Bitcoins though. Or in the case of USD redeemable codes 100% backed by USD.

didn't most paper money start out backed by one thing or another? It just seems to me that if you don't like "paper" money then you should't like the precursors to it either. Kinda the same way that if you want to quit smoking, it's a good idea to avoid places where you liked to smoke.

[ineededausername]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Zhou:  i watch the stock mkt most days minute by minute and am able to witness most major moves.  Mushoz is right; just b/c you haven't seen it happen before with Bitcoin doesn't mean it won't ever happen.  its impossible to write the perfect algorithm.

for example, i predict that as the market becomes larger and bigger players enter the scene with larger and more powerful bots or servers, they will intentionally examine your protocols and try to exploit it with surprise attacks.  what would a 10 minute straight up move in the price do to your algorithm and your customers holding short?  i have seen straight up moves (with a few red candles thrown in btwn) for hours on end clearly designed to destroy shorts as well as the vice versa.

btw, remember 10 days ago when we broke out of the 3.20 range up to 3.70 and then started to drift back down to 3.50 as the sellers and shorts stepped back in?  it was me who jammed the price to 3.99 knowing that it would cause all the other bots and shorts to climb on board and take it up and through 4.00 due to the intensity of the move and the "double ramp".  i believe we topped just over 4.50 on gox with your algorithm spiking to 4.95 or something ridiculous wiping out "a lot, seriously" of leveraged traders (using your own words from the Zhoutonged thread).  i understand that you had to reverse alot of these trades. now this wasn't a target against you or your shorts but it was a consideration given that i saw we were breaking out yet again and i was in the process of accumulating.  and i'm just a guy with a laptop and some intuition.

so in a sense, i do have experience trading on Bitcoinica via watching the effects of what i do on your algorithm.  the lesson for you is, you will always be vulnerable to unpredictable situations.

edit:  no offense but you often come across as being so smart as to be able to write the perfect algorithm.  perhaps its b/c of your young age which i admire more than anything.  but think about it from an open source perspective.  you are one guy trying to outsmart the "market" which is essentially the entire world expressing its opinion of the price.  within that market are all sorts of smart competitors who will try to compete with you.  they will study you and design even better more powerful algorithms.  never take anything for granted.

Oh wow, YOU caused that second spike.  Always wondered who it was.

[Mushoz]

I think credit instruments in Bitcoin should be avoided like the plague.
Getting away from the bankster-issued, debt-backed funnymoney is imho the *prime* benefit of Bitcoin.
For the same reason, am I very apprehensive about leveraged trading, since this is conventionally done with "margin"="credit"=debt/paper money.
Clearly, you can't (and thus don't) sell "paper" Bitcoins on mtGox - yet, so for now it might be ok, but what if credit (promise-to-pay) Bitcoin starts appearing for real within Bitcoin?? I think mtGox credits are a step in that dangerous direction.

 Please people - never forget the difference between real Bitcoin and promisary notes! That leads to the dark side 

-practical question: Does Bitcoinica follow the uptic-rule? If not, why not?

What do you think about Bitcoin redeemable MtGox codes? those seem strikingly similar to "paper" bitcoins.

Those are 100% backed by Bitcoins though. Or in the case of USD redeemable codes 100% backed by USD.

didn't most paper money start out backed by one thing or another? It just seems to me that if you don't like "paper" money then you should't like the precursors to it either. Kinda the same way that if you want to quit smoking, it's a good idea to avoid places where you liked to smoke.

There's plenty of examples to think of where the precursor is a good thing. As long as it stays at the precursor (in this case, as long as it stays 100% backed), it's fine with me. It's a very convenient way to move funds instantly. I've used it a few times to move funds between Bitcoinica and Mtgox.

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

[Mushoz]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

what if the spike comes at exactly 4 sec after the customer pushes his button?  what if a series of ramps occur?

i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC.  which is it?

[zhoutong]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

what if the spike comes at exactly 4 sec after the customer pushes his button?  what if a series of ramps occur?

i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC.  which is it?

If the spike comes exactly 4 seconds after order placement, we can be sure that the customer was not intending to exploit the spike because no one actually knew.

So it can be 0, or 50.

100 and 150 are possibilities when multiple customers place order at the same time, and it's extremely rare.

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

what if the spike comes at exactly 4 sec after the customer pushes his button?  what if a series of ramps occur?

i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC.  which is it?

If the spike comes exactly 4 seconds after order placement, we can be sure that the customer was not intending to exploit the spike because no one actually knew.

So it can be 0, or 50.

100 and 150 are possibilities when multiple customers place order at the same time, and it's extremely rare.

what if i'm the one who pushes the button on Bitcoinica, counts off 4 sec, and pushes the button on mtgox creating the spike?

[dree12]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

what if the spike comes at exactly 4 sec after the customer pushes his button?  what if a series of ramps occur?

i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC.  which is it?

If the spike comes exactly 4 seconds after order placement, we can be sure that the customer was not intending to exploit the spike because no one actually knew.

So it can be 0, or 50.

100 and 150 are possibilities when multiple customers place order at the same time, and it's extremely rare.

what if i'm the one who pushes the button on Bitcoinica, counts off 4 sec, and pushes the button on mtgox creating the spike?

Then you would have lost a lot of money creating a sizable spike, would you not?

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

what if the spike comes at exactly 4 sec after the customer pushes his button?  what if a series of ramps occur?

i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC.  which is it?

If the spike comes exactly 4 seconds after order placement, we can be sure that the customer was not intending to exploit the spike because no one actually knew.

So it can be 0, or 50.

100 and 150 are possibilities when multiple customers place order at the same time, and it's extremely rare.

what if i'm the one who pushes the button on Bitcoinica, counts off 4 sec, and pushes the button on mtgox creating the spike?

Then you would have lost a lot of money creating a sizable spike, would you not?

not if at a given pt in time both gox and bitcoinica have respective asks say @ $4 and $4.10 due to low activity in the market.  example:

i have accts at both gox and bitcoinica.  i push the buy button at bitcoinica to buy say 100 btc, count off 4 sec to secure the buy @ $4.10, then push the mtgox buy button to buy whatever it takes to create a spike to $4.5 before bitcoinica has a chance to hedge @ $4.  once bitcoinica adjusts its bid to say $4.4 i then sell those same 100 btc on bitcoinica for $4.4

[mjcmurfy]

Then you would have lost a lot of money creating a sizable spike, would you not?

Those pesky spreads would widen like like his eyes when he realized that he wasn't able to exit at anywhere near the price he had spiked it to. Shucks. But actually, this worries me a lot. If he was somehow able to prevent the reflex movement by continuing to buy/sell, the spreads might indeed stabilize at an exit point that would be quite profitable for him.

[cypherdoc]

Then you would have lost a lot of money creating a sizable spike, would you not?

Those pesky spreads would widen like like his eyes when he realized that he wasn't able to exit at anywhere near the price he had spiked it to. Shucks. But actually, this worries me a lot. If he was somehow able to prevent the reflex movement by continuing to buy/sell, the spreads might indeed stabilize at an exit point that would be quite profitable for him.

in an uptrending market like we have now, that wouldn't be hard.

[mjcmurfy]

It wouldn't be that hard, true, but it would be very risky. The difficulty lies not in the execution, but in the fact that none of us here has the capital required in order to do it - or else we wouldn't be complaining about it in public.