liquidity rebates and price volatility

[shtylman]

With the recent rise of the price of Bitcoins I wanted to talk about a few factors that I think are helping contribute to this.

1) Lack of short selling
2) No liquidity rebates on many major exchanges.

The first one means that anyone who wishes to get into bitcoins or trade on the markets is going to be bullish from the start. Anyone who buys in at any price using fiat (i.e. USD) will need the price to go up to make money (on non liquidity rebate exchanges) and anyone who is a miner or has many coins will want the price to go up so will not have real incentive to keep the price steady or push it down. As such I do not believe these markets represent the real price of bitcoins.

Now, everyone else who just wants to use Bitcoins will have a harder time as a result of these two conditions. Merchants will have a hard time keeping up with the currency exchange risk and buyers will be constantly thinking they could have gotten a better price here or there.. etc.

I say the above because I want to bring light to how I believe a liquidity rebate (like the one offered by Bitfloor) help those trying to provide a market keep the price stable. Let say I am a market maker and I put an order out to buy bitcoins (and the exchange has no rebate). My order executes and I am charged a fee. This means that if I want to sell those same bitcoins I am already pushing the price up. However, if I am given a rebate for the order, I could turn around and sell the bitcoins at the same price or just 0.01$ higher and again look to get a rebate. By being constantly on the inside of the book with very large orders, I can pin the price better and still make a profit. This means that I can market make without the price having to move at all. In my opinion this is an important aspect of the liquidity rebate that helps price stabilize when short selling is not available.

Obviously there are other nuances here, but I just wanted to throw this example out there for people who do some trading to try out and think about. It may be great to see the price of bitcoin rise rise rise for some, but for others it makes their transactions harder to manage so stable markets have their benefit as well

[Steve]

I couldn't agree more and I'm glad you're posting this to the forum.  I've been reluctant to talk about the advantages of your pricing model simply because I know it's a big advantage you have over other exchanges and I didn't think you'd appreciate it if others copied what you're doing in that area.

Over a sufficiently long time period, the right price for bitcoin will be discovered, but in shorter time frames, I think you're exactly right.  Charging fees for both the provider and taker puts an upward bias in the market and could spark speculative run ups.  I personally think there are other and better explanations for the current run up, but it's a good point none the less.  The liquidity rebate also provides incentives for people to add to the order book if they don't need to execute a trade immediately and that helps the overall liquidity and stability of the market.

[EnergyVampire]

With the recent rise of the price of Bitcoins I wanted to talk about a few factors that I think are helping contribute to this.

1) Lack of short selling
2) No liquidity rebates on many major exchanges.

The first one means that anyone who wishes to get into bitcoins or trade on the markets is going to be bullish from the start. Anyone who buys in at any price using fiat (i.e. USD) will need the price to go up to make money (on non liquidity rebate exchanges) and anyone who is a miner or has many coins will want the price to go up so will not have real incentive to keep the price steady or push it down. As such I do not believe these markets represent the real price of bitcoins.

Now, everyone else who just wants to use Bitcoins will have a harder time as a result of these two conditions. Merchants will have a hard time keeping up with the currency exchange risk and buyers will be constantly thinking they could have gotten a better price here or there.. etc.

I say the above because I want to bring light to how I believe a liquidity rebate (like the one offered by Bitfloor) help those trying to provide a market keep the price stable. Let say I am a market maker and I put an order out to buy bitcoins (and the exchange has no rebate). My order executes and I am charged a fee. This means that if I want to sell those same bitcoins I am already pushing the price up. However, if I am given a rebate for the order, I could turn around and sell the bitcoins at the same price or just 0.01$ higher and again look to get a rebate. By being constantly on the inside of the book with very large orders, I can pin the price better and still make a profit. This means that I can market make without the price having to move at all. In my opinion this is an important aspect of the liquidity rebate that helps price stabilize when short selling is not available.

Obviously there are other nuances here, but I just wanted to throw this example out there for people who do some trading to try out and think about. It may be great to see the price of bitcoin rise rise rise for some, but for others it makes their transactions harder to manage so stable markets have their benefit as well

+1

I love your liquidity rebate pricing model but I wonder if it has any negative impact on trading volume?
Scalp traders would most likely use market orders instead of limit orders, might this put them at a disadvantage?

[epetroel]

I love your liquidity rebate pricing model but I wonder if it has any negative impact on trading volume?
Scalp traders would most likely use market orders instead of limit orders, might this put them at a disadvantage?

Considering that even their taker fees are lower than most other exchanges, I doubt if this is an issue.

ETA: Personally, the only reason I haven't started trading there yet is the lack of Dwolla support.

[Andrew Vorobyov]

Correct, I implemented rebates model at https://bitcointalk.org/index.php?topic=93583.0

I hope to roll it out in 1-2 months, meanwhile, somebody of you have other good ideas, I would like to implement them.