[GLBSE] - MINING_B.HEADS.FUT / MINING_B.TAILS.FUT - Bet against the mining bonds

[Meni Rosenfeld]

In general, when the underlying event can be affected, prediction assets are at risk of manipulation. They are best suited for situations when the underlying cannot be feasibly affected, otherwise you want to directly entangle your instrument with the underlying and its negative.

What is an example of situations in which the underlying would not be feasibly affected?  I can think of natural disasters and climate change.  What else?

I'd tell you about the prediction assets I intend to issue, but why spoil the mystery?

You could try the following: Issue two bonds/futures, a short and a long, for a price roughly equal to the current index A. At the end of the month, where the index is now B, pay 2A-B for the short bond and B for the long bond. If you sell equal amounts of both bonds, your own position is neutral (you always pay 2A for a pair of bonds) and buying a short bond is equivalent to selling short the basket on margin.

Problem with that model is what happens when it's obvious to everyone that the market is going to tank?  Noone buys heads, everyone buys tails and I lose my shirt. 

There are multiple ways you can handle it. But as a general rule, for someone to take a short position someone else must take a long position, there's no way around that.

Now that you mention it, thinking about your proposed contract terms, it's not really a prediction market at all, it's more like a bet of the kind you find at betsofbitco.in, where funds are distributed in a somewhat arbitrary way from losers to winners.

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[burnside]

Now that you mention it, thinking about your proposed contract terms, it's not really a prediction market at all, it's more like a bet of the kind you find at betsofbitco.in, where funds are distributed in a somewhat arbitrary way from losers to winners.

I'm pretty sure this is what most markets do?  Transfer cash from investor to investor?  Markets themselves certainly do not create cash out of thin air?

The assets behind the securities being traded may generate cash, but the trading on the market itself is mostly a battle of wits, is it not?

[Sukrim]

Yes, but usually you create only one asset per assumption (that you can then go long or short) if you IPO a company (it wouldn't be very inspiring if you offer shares that earn money if your company dies from the beginning...) - you in this case have more of a "meta" asset where you don't sell parts of a debt or company but a bet that benefits nobody but the investors that bet on the right side + you as you probably take a cut. You don't create new value, you just offer a way of redistributing it, based on some set parameters.

As your bet (every asset is a bet!) is based on some other assets though, you offer earnings/losses by manipulating these. So far one could only try to bet on timely dividend payments of some bigger players out there (so you only had the incentive of DDOSing GLBSE for a weekend or so - too expensive for the potential gains), in your case I can bet on stock prices though. As bids are always shallow on GLBSE, bets like this one (especially if they offer high returns) give quite some incentives to severely disrupt trading.
I can with just 100 shares move the most traded asset on GLBSE currently (GIGAMINING) for more than 10% down. Currently there are a lot of open bids, as the prices are quite cheap and some people panic-sold - a few weeks ago I could have nearly crashed that asset with 100 shares.

[Meni Rosenfeld]

Now that you mention it, thinking about your proposed contract terms, it's not really a prediction market at all, it's more like a bet of the kind you find at betsofbitco.in, where funds are distributed in a somewhat arbitrary way from losers to winners.

I'm pretty sure this is what most markets do?  Transfer cash from investor to investor?

Yes, but not in an arbitrary way, in a way that guarantees that someone with more knowledge about an event than the market at a given time can profit on average (and thus is incentivized to share his knowledge with the world by investing accordingly). On betsofbitco.in I can have exact knowledge of the probability of the event, and still lose averaging on its instantiation.

[burnside]

... asset where you don't sell parts of a debt or company but a bet that benefits nobody but the investors that bet on the right side + you as you probably take a cut. You don't create new value, you just offer a way of redistributing it, based on some set parameters.

Sounds like 90% of what wall street does every day.  

As your bet (every asset is a bet!) is based on some other assets though, you offer earnings/losses by manipulating these. So far one could only try to bet on timely dividend payments of some bigger players out there (so you only had the incentive of DDOSing GLBSE for a weekend or so - too expensive for the potential gains), in your case I can bet on stock prices though. As bids are always shallow on GLBSE, bets like this one (especially if they offer high returns) give quite some incentives to severely disrupt trading.
I can with just 100 shares move the most traded asset on GLBSE currently (GIGAMINING) for more than 10% down. Currently there are a lot of open bids, as the prices are quite cheap and some people panic-sold - a few weeks ago I could have nearly crashed that asset with 100 shares.

But... could you keep it down for 5 days on average?

And, if you could, doesn't that benefit the people that want to buy the bond?  Seems like you selling your bonds at a loss to make a profit on my future would get fed back into the market as a benefit to the buyers of the bonds you're dumping.  If investors are smart, they'll catch on to your game fairly quickly and they'll just buy every time you try to dump your bonds, thus you lose.  The average doesn't go down enough to help you, and you've suffered a loss on the bonds you dumped.

I think a 5 day average is relatively safe and I wouldn't be surprised if people try to manipulate it but I'm not so sure they'll come out as well off as you might think.  The only easy manipulation I see is when the index is right at a 5.00% difference and they sell something off to push it to 5.0001%.

I'm excited to see how it actually pans out though.  If people actually do start panic selling, I might have to start buying.

[burnside]

Now that you mention it, thinking about your proposed contract terms, it's not really a prediction market at all, it's more like a bet of the kind you find at betsofbitco.in, where funds are distributed in a somewhat arbitrary way from losers to winners.

I'm pretty sure this is what most markets do?  Transfer cash from investor to investor?

Yes, but not in an arbitrary way, in a way that guarantees that someone with more knowledge about an event than the market at a given time can profit on average (and thus is incentivized to share his knowledge with the world by investing accordingly). On betsofbitco.in I can have exact knowledge of the probability of the event, and still lose averaging on its instantiation.

I realize that's how it's supposed to be.  But that's not how it really is.  Everyone, and I mean everyone games the system to the best of their ability.

It's most certainly not arbitrary though.  More like a game of chess.

[Sukrim]

... asset where you don't sell parts of a debt or company but a bet that benefits nobody but the investors that bet on the right side + you as you probably take a cut. You don't create new value, you just offer a way of redistributing it, based on some set parameters.

Sounds like 90% of what wall street does every day.  

And it's one of the biggest criticisms of the financial sector. There's a german proverb that could be translated like this: "Millions and millions of flies can't be wrong - eat more shit!".
I guess it's inevitable anyways, but still

As your bet (every asset is a bet!) is based on some other assets though, you offer earnings/losses by manipulating these. So far one could only try to bet on timely dividend payments of some bigger players out there (so you only had the incentive of DDOSing GLBSE for a weekend or so - too expensive for the potential gains), in your case I can bet on stock prices though. As bids are always shallow on GLBSE, bets like this one (especially if they offer high returns) give quite some incentives to severely disrupt trading.
I can with just 100 shares move the most traded asset on GLBSE currently (GIGAMINING) for more than 10% down. Currently there are a lot of open bids, as the prices are quite cheap and some people panic-sold - a few weeks ago I could have nearly crashed that asset with 100 shares.

But... could you keep it down for 5 days on average?

And, if you could, doesn't that benefit the people that want to buy the bond?

The average is as far as I know only a weighed (hopefully by shares traded, not BTC volume) average over all trades happening in the last 5 days. If I manage to do an insane amount of trades, the few trades that happen afterwards are negligible.

The easiest victim currently is PUREMINING:
200 shares are enough to trade to myself at 0.00010001 - fees would be ~50 Satoshis each share so I can do a LOT of trades. This would eb done by a script of course and during a time where there's very few trades in general. It would be interesting to have a test asset + account to try out such an attack by the way and see how many trades you can actually do per minute... probably a lot. The couple dozen trades later on wouldn't matter much.

All in all I'd need:
~60 BTC to buy the 200 shares, out of these I'd loose ~8-10 BTC to existing bids and maybe a BTC or so to GLBSE fees.

For under 100 USD cost and under 1000 USD in cash currently I could crash PUREMINING. It might also be useful to do this right now, so your ticker starts too low and might gain more than these 5% over the month easily just by reverting to normal market prices for the other bet.

I predict for your asset though, that you will simply have noone/too few ppl. buying it. Just look at HEDGE...

[burnside]

And it's one of the biggest criticisms of the financial sector. There's a german proverb that could be translated like this: "Millions and millions of flies can't be wrong - eat more shit!".
I guess it's inevitable anyways, but still

LOL, that's an awesome quote!  Sadly, so very true.

But... could you keep it down for 5 days on average?

And, if you could, doesn't that benefit the people that want to buy the bond?

The average is as far as I know only a weighed (hopefully by shares traded, not BTC volume) average over all trades happening in the last 5 days. If I manage to do an insane amount of trades, the few trades that happen afterwards are negligible.

The easiest victim currently is PUREMINING:
200 shares are enough to trade to myself at 0.00010001 - fees would be ~50 Satoshis each share so I can do a LOT of trades. This would eb done by a script of course and during a time where there's very few trades in general. It would be interesting to have a test asset + account to try out such an attack by the way and see how many trades you can actually do per minute... probably a lot. The couple dozen trades later on wouldn't matter much.

All in all I'd need:
~60 BTC to buy the 200 shares, out of these I'd loose ~8-10 BTC to existing bids and maybe a BTC or so to GLBSE fees.

For under 100 USD cost and under 1000 USD in cash currently I could crash PUREMINING. It might also be useful to do this right now, so your ticker starts too low and might gain more than these 5% over the month easily just by reverting to normal market prices for the other bet.

I predict for your asset though, that you will simply have noone/too few ppl. buying it. Just look at HEDGE...

If a third party put in buy orders at rock bottom prices, or set a bot up to watch the market, wouldn't they snag your manipulatory shares for a song?

You are right that there may not be many people buying it.  It's very much experimental.  I'd be a little sad if no one is interested, but life goes on. 

[Meni Rosenfeld]

Now that you mention it, thinking about your proposed contract terms, it's not really a prediction market at all, it's more like a bet of the kind you find at betsofbitco.in, where funds are distributed in a somewhat arbitrary way from losers to winners.

I'm pretty sure this is what most markets do?  Transfer cash from investor to investor?

Yes, but not in an arbitrary way, in a way that guarantees that someone with more knowledge about an event than the market at a given time can profit on average (and thus is incentivized to share his knowledge with the world by investing accordingly). On betsofbitco.in I can have exact knowledge of the probability of the event, and still lose averaging on its instantiation.

I realize that's how it's supposed to be.  But that's not how it really is.  Everyone, and I mean everyone games the system to the best of their ability.

It's most certainly not arbitrary though.  More like a game of chess.

I don't think you understand what I'm talking about.

[burnside]

I don't think you understand what I'm talking about.

That is entirely possible. 

I'm very much open to alternate explanations if I didn't catch the first one correctly.

[Meni Rosenfeld]

you in this case have more of a "meta" asset where you don't sell parts of a debt or company but a bet that benefits nobody but the investors that bet on the right side + you as you probably take a cut. You don't create new value, you just offer a way of redistributing it, based on some set parameters.

A proper prediction market certainly creates value. It gives people with knowledge about an event, or the ability to obtain it, an incentive to obtain knowledge and share it with the world, which can then act upon it. Concepts such as Futarchy take this idea several steps further, just to give a hint on the usefulness.

I don't think you understand what I'm talking about.

That is entirely possible.  

I'm very much open to alternate explanations if I didn't catch the first one correctly.

In short: Prediction markets should come in the form of an asset that has a fixed payout conditioned on the underlying event, but not on any meta factors. Betsobitco.in don't offer traded assets, and your payout is affected by what other betters do in the future; your proposal is a traded asset, but its payout depends on the number of assets sold (if this number is fixed in advance the problem isn't as bad).

The classic asset is "pays out 1 BTC if X happens". If this asset is traded at p BTC but I think the probability of X happening is q, I can buy it and profit on average if q>p, or buy the complementary asset if q<p. By so doing the traded price becomes closer to p, so if I'm right the whole world now has better knowledge of the event. And if I'm wrong I'll lose on average and eventually not have any money left to feed bogus data to the market.

[burnside]

In short: Prediction markets should come in the form of an asset that has a fixed payout conditioned on the underlying event, but not on any meta factors. Betsobitco.in don't offer traded assets, and your payout is affected but what other betters do in the future; your proposal is a traded asset, but its payout depends on the number of assets sold (if this number is fixed in advance the problem isn't as bad).

The classic asset is "pays out 1 BTC if X happens". If this asset is traded at p BTC but I think the probability of it happening is q, I can buy it and profit on average if q>p, or buy the complementary asset if q<p. By so doing the traded price becomes closer to p, so if I'm right the whole world now has better knowledge of the event. And if I'm wrong I'll lose on average and eventually not have any money left to feed bogus data to the market.

That makes a lot more sense to me, thank you.

I do still feel like a traditional short is (at arm's length) not much different from a short this future.  (edited, sorry)  I guess the main difference is that the swing in a traditional short isn't quite so pronounced, and scales based on the actual value of the asset.  In my case I am not scaling the return based on how far the INDEX swings, so if you fall on the wrong side of things, you can definitely lose a bit.  The formula may have to be adjusted for that, but if I do adjust it, it comes at the expense of the gains for the other future.

I suspect that when it becomes easier to find someone from which to borrow shares, then the market for this future will almost certainly vanish.  Something along the lines of a brokerage organization or something would be necessary I think.

I absolutely agree that for this future to function, someone has to buy into both sides.  After a few months operating it I may be able to build up a pool of BTC with which I'd be able to guarantee a certain return even if no one else buys in.  For example, I could always buy in 100 shares myself on both sides.  I will also likely shift the formula such that the gains are a little higher, and the losses a little lower.  I need a pool of operational funds for that to happen though, so I'm hoping we do get some buyers in the next few months so that I can make improvements on that in future months.

[burnside]

Looks like it's up and live!  Thanks a bunch to the guys at GLBSE for helping me get it going!


edit: 7/31/12: And I've taken it back down again, not much interest.  I think in a couple of ways it was fundamentally flawed.  I'll rethink it and maybe come back later.