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Author Topic: How the Price is Determined is VERY Important  (Read 1433 times)
EuSouBitcoin
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March 27, 2012, 06:02:06 PM
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There are many avenues for speculating on the price of many different things. Some avenues are better than others. For example, I prefer speculating on exchange rates via FX Futures instead of trading spot forex. Why? In the futures markets, the bid and ask are determined by orders placed from ALL participants. If June EUR/USD futures are 1.3341 bid and 1.3349 ask, I can change the market by placing an order to buy 1 contract at 1.3342. Now the market will be trading 1.3342 to 1.3349. The rules of the exchange say that this contract can't trade at a price less than 1.3342 unless I am filled on my order.

At a typical retail forex trading shop, things operate very differently. The bid and ask are determined by the dealer and ONLY the dealer. Let's say he sets his EUR/USD market at 1.3341 to 1.3349. You enter an order to buy at 1.3348. The dealer keeps the market at 1.3341 to 1.3349. Let's say another client enters an order to sell at 1.3342. The dealer keeps the market at 1.3341 to 1.3349. You are willing to pay 1.3348 and another client wants to sell at 1.3342, but BOTH YOUR ORDERS GO UNFILLED! That's how it works. In other words, the deck is stacked against you. To add insult to injury, you can easily get stopped out of your position because ONLY THE DEALER CONTROLS his market. If you are long EUR/USD at 1.33, and have a sell stop in at 1.20, the dealer can temporarily dip the market to 1.20, sell you out at 1.20 (to him) and then bounce the price back to 1.3341 to 1.3349 EVEN THOUGH EUR/USD DIDN'T MOVE AT ALL ON OTHER MARKETS!  It is this control of the price that I don't like and why I don't trade forex through a retail shop like this.

Now there are some ECN alternative spot forex brokers that charge a commission, such as interactive brokers, and send your orders to forex dealers to take the other side. I think trading through that type of broker will give you a higher probability of trading profitably.

In BTC, currently there are not futures markets (correct me if I'm wrong). But there is a bitcoin equivalent to retail spot forex trading. It's called Bitcoinica. How are the bid and ask prices determined at Bitcoinica? Does Bitcoinica just set them wherever they want? If you place a buy order in between the spread you won't change the bid ask. Can Bitcoinica move their market prices down temporarily to sell you out of your long position even if the prices on Mt Gox haven't changed at all?

It's dog eat dog out there. Caveat emptor.
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shtylman
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March 27, 2012, 06:30:37 PM
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As far as I understand (and this maybe be an incorrect assessment) Bitcoinica controls the spreads and prices you see on their platform. When you trade there, you are basically trading at the prices they have specified for you (essentially against them). This control is how they can ensure their liquidity and close you out of your positions if the prices move too much.

This information was gathered by reading their faq (sections on spreads and liquidity)
https://bitcoinica.com/pages/faq
EuSouBitcoin
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March 27, 2012, 06:58:07 PM
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I haven't traded at Bitcoinica. To those that have traded at Bitcoinica, do you think it's clear what the rules are and how things work?

Before playing any game of chance I think it's important to know the rules of the game. Plus you should always be aware of potential fraud.
http://en.wikipedia.org/wiki/Foreign_exchange_fraud
MPOE-PR
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March 27, 2012, 09:35:20 PM
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You probably need to look into options. Check sig.

My Credentials  | THE BTC Stock Exchange | I have my very own anthology! | Use bitcointa.lk, it's like this one but better.
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March 27, 2012, 11:26:48 PM
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We don't have a futures market but we have a big spot market, which is Mt. Gox. The nature of Bitcoin allows spot trading to be easily done.

Bitcoinica has the right to determine the prices for everyone trading on the platform. We are pegged to Mt. Gox prices at the moment, because it's in our best interest to do so (until we have another exchange to effectively hedge on). We never make any guarantees on price accuracy but we are showing every single price point (especially extreme price points) in our charts since the site was launched!

Bitcoinica has traded over 8 million Bitcoins since launch. The business is highly sustainable and scalable. So we seriously want to act responsibly for our customers.

Founder of NameTerrific (https://www.nameterrific.com/). Co-founder of CoinJar (https://coinjar.io/)

Donations for my future Bitcoin projects: 19Uk3tiD5XkBcmHyQYhJxp9QHoub7RosVb
Stephen Gornick
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March 28, 2012, 06:18:02 AM
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Bitcoinica has traded over 8 million BTC/USD positions since launch.

Fixed that for you.

MPOE-PR
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March 28, 2012, 11:10:08 AM
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Quote
Bitcoinica has traded over 8 million BTC/USD positions since launch.

I asked since we're doing this and apparently MPOE has traded a total of 17,309 bitcoins in CALL/PUT positions since launch (about the same time as Bitcoinica, maybe a coupla weeks earlier or something like that). So apparently plenty of room to grow Smiley

My Credentials  | THE BTC Stock Exchange | I have my very own anthology! | Use bitcointa.lk, it's like this one but better.
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May 06, 2012, 10:06:26 PM
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In BTC, currently there are not futures markets (correct me if I'm wrong). But there is a bitcoin equivalent to retail spot forex trading.

I'm also experienced in trading and I fully share your thoughts about FOREX vs. futures-based approach.

So far, I'm leading the futures market development, and my trading platform is quite close to being ready.
The main problem for a BTCUSD futures contract is really market making, the market should always be liquid. However, there are a few interesting ideas to solve this problem.
Additionally as a first step I want to provide commodities futures denominated in BTC (Gold and Oil are the first to be considered). I think ability to invest your Bitcoins into Gold and Oil sounds quite fun.

A thread with some more information is here: https://bitcointalk.org/index.php?topic=50817.0 Also all new info regarding derivatives markets will be published there.

Margin trading platform OrderBook.net (ICBIT): https://orderbook.net
Follow us in Twitter: https://twitter.com/orderbooknet
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