Futures and Stock trading denominated in bitcoins

[1QaZxSw2]

TLDR: trade S&P 500 futures or USD/BTC EUR/BTC futures from a web page.

The best traders trade futures and I aim to enable trading USD, EUR, indexes and possibly futures on some select stocks denominated in BTC. Legally, this can be done as long as all inputs and outputs to the exchange are in BTC.

Contract specifications are not yet finalized, but lets say for example:

USD/BTC contract:
tick size: $0.01 = 1BTC
contract size: $1 = 100 BTC
Margin: 100 BTC/contract

So for example, you could buy a contract at current price (say 5.5) and if it goes up to 5.7 and you exit your position, you make 0.2*100 = 20BTC.

As the market volume improves and BTC value gains stability, a bigger contract ($1 = 1000BTC) may be introduced.

More details are still being worked out, so any input is appreciated.

[1715075320]

1715075320

[1715075320]

1715075320

[Seal]

I was thinking of doing something like this, however it'll be a LOT of work to make it a. Legal and b. Trustworthy

I had a basic concept that would allow people to buy into a major stock index with bitcoin. Is this what you want to offer but for futures contracts?

So what you are offering are essentially real futures contracts on the open markets but paid for in BTC? The biggest pain would be in the execution of the real orders when placed in BTC on your site.

[1QaZxSw2]

I was thinking of doing something like this, however it'll be a LOT of work to make it a. Legal and b. Trustworthy

I had a basic concept that would allow people to buy into a major stock index with bitcoin. Is this what you want to offer but for futures contracts?

So what you are offering are essentially real futures contracts on the open markets but paid for in BTC? The biggest pain would be in the execution of the real orders when placed in BTC on your site.

If all inputs and outputs are in BTC, its legal because the government does not regulate BTC yet. To them its nerds trading pokemon cards.

Trustworthy ... what exactly do you mean? You can see your BTC deposits, withdraw them when not needed to cover open orders or contract positions, download trade and order history, just like any FCM.

The only issue I suppose is if the website folds and disappears. This kind of trust would need to build over time, so we could start with tiny contracts (1 BTC = 1BTC).

Real order execution wont be a pain at all. Order Book and order matching is a well understood and solved problem.

[finway]

Interesting! 
Can you include "Chinese Shanghai Stock Index"?

[Seal]

The only issue I suppose is if the website folds and disappears. This kind of trust would need to build over time, so we could start with tiny contracts (1 BTC = 1BTC).

Real order execution wont be a pain at all. Order Book and order matching is a well understood and solved problem.

I'm not sure of your experience but i dont think it'll be as easy as you make it out to be. Will a broker really let you place lots of small 1BTC ~ $5 trades? Also what if someone wants to expand their position a week down the line and the BTC->USD rate has changed (not to mention the price of the future), can you ensure accurate statements are returned to individuals when the trading gets more complex?

*edit* fix the quote boxes

[1QaZxSw2]

I'm not sure of your experience but i dont think it'll be as easy as you make it out to be. Will a broker really let you place lots of small 1BTC ~ $5 trades? Also what if someone wants to expand their position a week down the line and the BTC->USD rate has changed (not to mention the price of the future), can you ensure accurate statements are returned to individuals when the trading gets more complex?

I'm a professional futures trader and am intimately familiar with how the futures market works. The way futures work is that any price change is a profit or loss to your account. The BTC/USD rate change IS the point of trading it, not a complication. The value of the contract increases/decreases with the price of the underlying security.

i.e. you short a USD contract in BTC, lets say at 0.2000 (That is 1 dollar is 0.2 BTC, i.e. 1BTC=$5). You now hold one contract for 100 BTC/USD. If the rate changes, ie. USD loses value relative to BTC and price moves to 0.1000 BTC (i.e., 1BTC becomes $10), and you close your position. Your net profit is 0.1*100 = 10BTC, which is credited to your account. Since we don't handle USD and everything is denominated in BTC and all statements are in BTC, the accuracy of statements is not a concern.

100BTC is 0.01BTC/tick and would be a very small contract and is probably ideal when BTC is volatile. It will also allow smaller margin deposits. Once prices are stable, a larger contract such as 0.1 and 1 BTC/contract can be introduced, which would give a profit of 100BTC and 1000BTC respectively.
 

[1QaZxSw2]

Interesting! 
Can you include "Chinese Shanghai Stock Index"?

If there is sufficient interest, we will most certainly introduce shanghai index.

[notme]

I believe his point is that in order for you to provide profits, you have to profit, thus you have to make a corresponding trade on the real markets to hedge your customers' positions.  Do you have the ability to make such trades on a small scale without losing everything to fees?  What about slippage (you promise price X, but it moves 5% before you can make the trade due to a big news story breaking).

[DeathAndTaxes]

I believe his point is that in order for you to provide profits, you have to profit, thus you have to make a corresponding trade on the real markets to hedge your customers' positions.  Do you have the ability to make such trades on a small scale without losing everything to fees?  What about slippage (you promise price X, but it moves 5% before you can make the trade due to a big news story breaking).

This.

More directly to the OP, do you intend to buy & sell the underlying security based on member's actions in BTC exchange?

[1QaZxSw2]

I believe his point is that in order for you to provide profits, you have to profit, thus you have to make a corresponding trade on the real markets to hedge your customers' positions.  Do you have the ability to make such trades on a small scale without losing everything to fees?  What about slippage (you promise price X, but it moves 5% before you can make the trade due to a big news story breaking).

That's not how futures work. A bid from one trader is matched to an ask from another trader. A gain for the first trader is a loss to the second trader. The trading system does not trade against client orders, such a system would present inherent conflict of interest issues.

We would only take a fee/commission per round-trip transaction. This is exactly how FCM operate in the fiat world.

Also, all client funds are stored in a segregated funds account and never mixed with our own accounts. This allows for easy auditing and reporting for example.

[1QaZxSw2]

I believe his point is that in order for you to provide profits, you have to profit, thus you have to make a corresponding trade on the real markets to hedge your customers' positions.  Do you have the ability to make such trades on a small scale without losing everything to fees?  What about slippage (you promise price X, but it moves 5% before you can make the trade due to a big news story breaking).

This.

More directly to the OP, do you intend to buy & sell the underlying security based on member's actions in BTC exchange?

No.

Again, that is not how futures work. We do not make any trades at all. Hedging/risk management is based on client margin. Clients need to maintain say, 100 BTC/contract they trade. If the price moves against their position further than their margin, such positions are liquidated.

Since we do not place trades, we do not lose anything to fees.

Slippage is an issue with market orders and stop market orders in a thinly traded market (just like any market) but it does not apply to us, but an individual trade. Also we do not promise price X. Traders get price X based on bid/ask by other traders. Limit order at X get filled at X or better. Stop limit orders get filled at price X or better. Only Stop market and market orders can have a slippage which is the risk of using such order type.

[notme]

I believe his point is that in order for you to provide profits, you have to profit, thus you have to make a corresponding trade on the real markets to hedge your customers' positions.  Do you have the ability to make such trades on a small scale without losing everything to fees?  What about slippage (you promise price X, but it moves 5% before you can make the trade due to a big news story breaking).

That's not how futures work. A bid from one trader is matched to an ask from another trader. A gain for the first trader is a loss to the second trader. The trading system does not trade against client orders, such a system would present inherent conflict of interest issues.

We would only take a fee/commission per round-trip transaction. This is exactly how FCM operate in the fiat world.

Also, all client funds are stored in a segregated funds account and never mixed with our own accounts. This allows for easy auditing and reporting for example.

Except for the fact that if you do this without trading the underlying security, both sides of the trade have to be closed at once.  Why would someone trade with you if their position can be closed against their will when they have plenty of margin?

[DeathAndTaxes]

No.

Again, that is not how futures work. We do not make any trades at all. Hedging/risk management is based on client margin. Clients need to maintain say, 100 BTC/contract they trade. If the price moves against their position further than their margin, such positions are liquidated.

Since we do not place trades, we do not lose anything to fees.

Slippage is an issue with market orders and stop market orders in a thinly traded market (just like any market) but it does not apply to us, but an individual trade. Also we do not promise price X. Traders get price X based on bid/ask by other traders. Limit order at X get filled at X or better. Stop limit orders get filled at price X or better. Only Stop market and market orders can have a slippage which is the risk of using such order type.

Yes I understand how futures markets work.  I assumed you intended to operate as a bucketshop and "match" unmatched orders against actual S&P contracts.  If you don't do that then there is no need to purchase the underlying but it also means liquidity could suffer.

So since you will have no purchases of underlying asset the market will be as thin as the liquidity you are able to provide (via size of market participants).  Do you anticipate issues with getting sufficient volume to have any meaningful liquidity?  Maybe you don't. I mean a market where I may need to wait hours to get a trade executed isn't much of a market.  Do you intend to operate as a market maker to provide liquidity?

Don't take this as an attack, it is an interesting idea but any market is only as valuable as the liquidity it has so these are genuine queries into how you intend to operate.

[1QaZxSw2]

Except for the fact that if you do this without trading the underlying security, both sides of the trade have to be closed at once.  Why would someone trade with you if their position can be closed against their will when they have plenty of margin?

It is never closed against their will when they have plenty of margin. Its only closed when the margin requirement is violated. This should happen very rarely (someone has blown their account).

You close a long position by selling your contracts. Your sell order will go against the prevailing bid. This is true also when a margin violation causes a contract liquidation. The person who put in the order at the prevailing bid is getting their order filled, i.e. they are establishing their position or exiting per plan. Their position is never forcibly closed.

From the nature of questions, I can see that some here may have never traded futures. Fortunately, there will be a virtual account where traders can trade in a simulated environment to get the hang of it before venturing with real bitcoins.

Yes I understand how futures markets work.  So since you will have no purchases of underlying asset the market will be as thin as the liquidity you are able to provide (via size of market participants).  Do you anticipate issues with getting sufficient volume to have any meaningful liquidity?  Maybe you don't.  I assumed you intended to operate as a bucketshop and "match" unmatched orders against actual S&P contracts.  If you don't do that then there is no need to purchase the underlying but it also means liquidity could suffer.
 
I mean a market where I may need to wait hours to get a trade executed isn't much of a market.  Do you intend to operate as a market maker to provide liquidity?

Don't take this as an attack, it is an interesting idea but any market is only as valuable as the liquidity it has so these are genuine queries into how you intend to operate.

Yes, liquidity can be a problem and at present we do not have plans to be a market maker. But we do plan to have an open API, which will allow other participants to act as market makers and add to liquidity.

[notme]

Ok, it won't be closed against your will, but it can't always be closed unless someone else will take up the other side.  Getting stuck in a position is just as bad.

[1QaZxSw2]

Ok, it won't be closed against your will, but it can't always be closed unless someone else will take up the other side.  Getting stuck in a position is just as bad.

For such a situation to arise, there should be absolutely no bids below. This basically means that the market has shutdown and every order has been removed suddenly. Bitcoin being new, there are no guarantees it will never happen but it is extremely unlikely. Look at the order book on Mt. Gox for instance, the order book is always full at very fine granularity.

Even in the unlikely case that the market only has two participants and your buy moves against you, the person who sold short eventually would place a bid to buy back his short.

Even if he forgot about his short (or died), we would need to place a bid at the minimum price, ie. 0.0001 and your trade would be liquidated against it. These scenarios occur very very rarely. For example, such an event did occur during the May flash crash.

The problem you are considering is a very theoretical one and does not occur even in the thinnest markets except in extremely rare circumstances. There is always a bid or an ask somewhere.

In any case, we plan to offer automated trade management, i.e., when you enter a position, the system will automatically place stop loss and target orders for you per your configuration. Trading with stops is a very good practice and you should never need to encounter an adverse move so bad that your position needs to be liquidated.

[notme]

Good luck getting participants.  I predict insurmountable liquidity issues, but don't let me stop you.

[1QaZxSw2]

Good luck getting participants.  I predict insurmountable liquidity issues, but don't let me stop you.

I appreciate your concerns and thank you for vetting the system. Its certainly beneficial to others.

We plan to start with the simulated trading and then add instruments as soon as we have a certain minimum number of participants who have tradeable accounts. That way risk of low liquidity can be mitigated.

Our trade API should also allow participants to write automated market makers and arbitrage applications that would add to the overall liquidity of the system. The simulated environment allows them to test their apps before sending orders in larger quantities to the real market.

[markm]

I guess I do not understand what you mean by futures contracts.

I thought they are things like "10,000 pork bellies on 1st december".

If you never actually plan to buy any actual pork bellies, won't you be stuck when someone actually lets the contract run its course instead of selling it off to someone else who sells it to someone else etc?

Come the delivery date, who-ever is stuck with it is stuck with taking delivery of the actual thing contracted to be delivered, aren't they? And presumably thus someone is also stuck with having to actually deliver it?

-MarkM-

[1QaZxSw2]

I guess I do not understand what you mean by futures contracts.

I thought they are things like "10,000 pork bellies on 1st december".

If you never actually plan to buy any actual pork bellies, won't you be stuck when someone actually lets the contract run its course instead of selling it off to someone else who sells it to someone else etc?

Come the delivery date, who-ever is stuck with it is stuck with taking delivery of the actual thing contracted to be delivered, aren't they? And presumably thus someone is also stuck with having to actually deliver it?

-MarkM-

Technically, yes. But in reality, futures are a speculative and hedging instruments. Most futures contracts are closed on the same day as they are opened. Also, there is the concept of a continuous contract that automatically rolls over to the next expiration. That way, you never actually deliver anything, your position is exited at a profit or loss when you wish. Of course, if your position goes against you so much that you violate margin requirements, it may be liquidated but responsible traders who trade with stops never encounter this situation.