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Author Topic: Would you be interested in margin trading on GLBSE?  (Read 1760 times)
unfinishe
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July 19, 2012, 08:07:44 PM
 #1

I know that there are margin trading platforms for the Bitcoin/currency exchanges, but would anybody be interested in one for the GLBSE? I've been working with the GLBSE API lately, making a couple trade bots (I've turned them off for now, to ease the load), and I think it would be fairly straightforward. Basically, I would just provide an interface to allow people to borrow and trade on margin accounts, but controlling the withdrawal so that they can't just abscond with the money. What do you all think?

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July 19, 2012, 09:05:06 PM
 #2

Seems like an interesting idea.  You would basically become a broker, lending your own funds to allow customers to use leverage, charging them interest to do so.  Along the same lines you could also allow customers to short sell by lending them shares from your own inventory.

unfinishe
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July 19, 2012, 09:22:17 PM
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Seems like an interesting idea.  You would basically become a broker, lending your own funds to allow customers to use leverage, charging them interest to do so.  Along the same lines you could also allow customers to short sell by lending them shares from your own inventory.

I was thinking at first of being more of an facilitator between lenders and traders, and letting them work out their own interest rates and margin requirements. But until there's more interest, I suppose I could start by lending my own coins (although I don't have much to lend at the moment).

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Sukrim
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July 19, 2012, 09:36:40 PM
 #4

Well, you could create an asset on GLBSE and raise money through that... on the other hand people who do lots of work but have little BTC to buy their own shares tends from experience to be a bad mixture to begin with (search for SIN for an excellent example).

How would you enforce this stuff, so if I lend 50 TYGRR.BOND-P shares to a stranger, how will I get 'em back?

Edit: This could of course be done via a deposit of let's say 70 BTC to you and I either get the 70 BTC or my 50 shares back. However, if someone already HAS the money, why would he borrow shares in the first place? It is usually not that much of a problem to buy shares, the bigger issue currently seems selling them for BTC as there are fewer open orders.

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unfinishe
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July 19, 2012, 10:07:20 PM
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So, as far as I understand, the way margin trading works is that you have to put up a certain amount of money to act as collateral. You then will receive whatever amount that is in the account, minus what you owe. Basically, you get all the gains, but you also take all the losses.

For example, if you want to borrow 100 BTC, you might have to put up 100 BTC. You then can trade with the 200 BTC. If the price rises 25%, so you now have 250 BTC worth, you can return the 100 that you owe (plus interest), and get 150 back (minus interest), giving you 50 BTC profit, which is double the amount you would have gotten if you had just traded your own 100 BTC.

However, if the price drops 25%, you only have 150 BTC worth. You would only receive 50 BTC, or 33% of the account value.

Depending on the terms of the loan, the lender can require you to own a certain minimum percentage of the account (to prevent the account from dropping more and becoming worth less than what you owe). If your percentage drops down below this limit, the lender can "call" back the loan. So you have to deposit more to keep the proportions correct, or the shares will be sold (even at a loss) and the balance will be paid back.

So what I would do is make a system that would let the borrowers trade with the account on GLBSE (through the API), but keep them from withdrawing more than they owe. Both the lender and the borrower would have to trust that I wouldn't abscond with the funds (or break the terms of their agreement), but as long as they can do that, then they don't have to worry about each other.

Edit: Shorting would just be the reverse. You borrow the shares, sell them, and possibly trade with the funds. If the original stock price goes up, you'll have to pay more to buy the shares and pay back the loan. If the price goes down, or if you made enough money trading to make up for the price increase, you buy the shares, return them and pocket the difference.

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puffn
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July 19, 2012, 11:02:03 PM
 #6

What is there to stop someone from using this to create fake securities just to use your api to buy shares at 120% of input value, then run away with your funds, and their initial value?

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unfinishe
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July 19, 2012, 11:10:33 PM
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What is there to stop someone from using this to create fake securities just to use your api to buy shares at 120% of input value, then run away with your funds, and their initial value?

That is a valid concern. Perhaps we would need to impose limitations preventing shares from being bought in new and low volume securities.

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puffn
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July 20, 2012, 12:17:49 AM
 #8

You also need to protect against passthrough bonds. If pirate turns out to be a ponzi, this could also create a huge problem. A diversification requirement would not even solve this as there are multiple pass throughs to invest in. Your best bet IMHO is to do the research on the issues yourself, and then allow others to invest in issues that you believe are safe.

Looking for safe diversification? YABIF: Good Returns, Low Fees, Low Risk.

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unfinishe
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July 20, 2012, 12:45:54 AM
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You also need to protect against passthrough bonds. If pirate turns out to be a ponzi, this could also create a huge problem. A diversification requirement would not even solve this as there are multiple pass throughs to invest in. Your best bet IMHO is to do the research on the issues yourself, and then allow others to invest in issues that you believe are safe.

Personally, I'm one to shy away from the pass-through bonds, but I suppose I would let lenders dictate the terms of the account however they want as long as they're willing to assume the risk.

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July 20, 2012, 12:48:47 AM
 #10

You also need to protect against passthrough bonds. If pirate turns out to be a ponzi, this could also create a huge problem. A diversification requirement would not even solve this as there are multiple pass throughs to invest in. Your best bet IMHO is to do the research on the issues yourself, and then allow others to invest in issues that you believe are safe.

I know MOVE.TO fund and MU are pirate free, and lately GBF (DeadTerra) has dropped pirate investment.


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July 20, 2012, 01:19:29 AM
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You also need to protect against passthrough bonds. If pirate turns out to be a ponzi, this could also create a huge problem. A diversification requirement would not even solve this as there are multiple pass throughs to invest in. Your best bet IMHO is to do the research on the issues yourself, and then allow others to invest in issues that you believe are safe.

Personally, I'm one to shy away from the pass-through bonds, but I suppose I would let lenders dictate the terms of the account however they want as long as they're willing to assume the risk.

The problem with this is that the asset will lose all value. This means that the principal, and your margin loan will both be at full risk. Margin companies will not stay in business like this long.

Looking for safe diversification? YABIF: Good Returns, Low Fees, Low Risk.

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unfinishe
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July 20, 2012, 01:32:29 AM
 #12

The problem with this is that the asset will lose all value. This means that the principal, and your margin loan will both be at full risk. Margin companies will not stay in business like this long.

That's why I would restrict the money I loan, and any lender who chooses so, so the trader wouldn't be able to deal in Pirate-related securities. But if a lender wanted to allow it, and then charge a higher interest rate, then I would not see a problem with it.

Check out the results from my Bitcoin Survey Project!
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puffn
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July 20, 2012, 02:08:46 AM
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This sounds great to me. I would really be interested in trying this out on both sides. I just wanted to make sure you were secure from people that would take advantage of your service to magnify returns at your personal expense.

Looking for safe diversification? YABIF: Good Returns, Low Fees, Low Risk.

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brendio
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July 20, 2012, 03:16:08 AM
 #14

I'm interested, and in fact intend shortly to offer margin trading to large players and I'd just account for things manually. I'm interested in your platform and if it worked well, may consider licencing it from you.

What is there to stop someone from using this to create fake securities just to use your api to buy shares at 120% of input value, then run away with your funds, and their initial value?

Margin lenders deal with this by having an approved list of securities. They will often lend up to 75 % against blue chip stocks, but lower amounts for riskier assets. Penny dreadfuls generally count as nothing towards your collateral.

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July 22, 2012, 10:08:14 AM
 #15

Obviously you (most of you)  have never used margin in real world. Cheesy
For start, please make sure you actually understand how it works and how and why margin calls are calculated. Especially in illiquid and volatile markets, minimum margin requirement must be set properly or you will be fucked. If you do not fully understand wtf minimum margin requirement is, you will be fraked sooner rather than later and so will be your clients.

Next, you need to figure out how you can make sure your client wont run away with BTC they borrowed and shares/turds/bonds they have bought. In real world, share/bond/etc holder actually has no direct access to shares/bonds unless you hold bearer bonds (last ones will be extinct really soon)  or have ordered physical delivery of your stock certificate (I did this once for fun and they looked beautiful Smiley ) Every trade you do in the real world, will be cleared through so called Clearing House. Even OTC trades. To be on a safe side, you need to copy that idea to your own business model. There is no need to waste your time and invent "something new".
 
Now, if you set up a "broker/clearing house" - you will keep your clients turds, bonds, shares etc - you can start thinking about margin trading. Your client can not run with your BTC and shares because you hold those for them.

1) Do not underestimate the importance of liquidity. If you can not sell your clients holdings and the account gets below minimum margin requirement - margin call - you will get hurt.
2) selling to cover a margin call for a client in previous example, can start a avalanche of margin calls in other accounts. Wink
3) If you become flexible on margin calls (let it slide because ...) you will get hurt and so will your clients.
4) Better to set your margin calls lower than higher - You will get hurt bad, if the shit hits the fan and there is no liquidity (see 1 and 2).
5) do not "I hope it will go up so I recover blaa blaa"  - you will get hurt.
6) do not get emotionally involved - you will get hurt. If calculations call for sell, you have to do it.  (always see if you have matching buy orders)
7) do not get sucked in to 'fractional reserve banking' - No one wants to read (your) bullshit excuses how fiat/btc transfer will take "longer time" because you have some "mysterious technical problems" blaa blaa blaa Smiley a.k.a you used your clients money to finance someones deals and now you have liquidity problems. Read up on "bank run"


Good luck and keep us posted.

BTW, if you like to ask questions or need to figure something out, send me a PM and I'll be happy to help you out.

While reading what I wrote, use the most friendliest and relaxing voice in your head.
BTW, Things in BTC bubble universes are getting ugly....
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July 22, 2012, 10:37:24 AM
 #16

Yes, margin trading on GLBSE assets is very important, preferably on GLBSE itself but an external platform would work too.

No, I don't think it as straightforward as you think. If you treat it as an easy hobby project rather than a serious undertaking, I wouldn't trust the result enough to use it.

If you go ahead with this, keep in mind the following:

1. You need to take into account not only asset prices, but also dividends. If someone short-sells an asset, you need to keep track of dividends paid and deduct them from his balance, and so on.

2. Most of the assets aren't very liquid, with low depth and high volatility.

3. Many of the assets are capable of very large swings - e.g., buyback clauses of bonds which instantly cause the price to spike, pass-through bonds which can drop to 0 if their underlying defaults, or just the bond issuer defaulting. For example, it is fundamentally impossible for an untrusted party to take a leveraged long position on Pirate, because 100% backing is needed in case he defaults.

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July 22, 2012, 11:59:56 AM
 #17

And keep in mind, that every perpetual mining turd (no part of the turd coupon is at fixed % rate. X Mh/s only aka turd holder can enjoy all the risks) are perpetual losers unless BTC difficulty starts to drop and earnings per Mh/s start to go up)

While reading what I wrote, use the most friendliest and relaxing voice in your head.
BTW, Things in BTC bubble universes are getting ugly....
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July 22, 2012, 12:19:47 PM
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And keep in mind, that every perpetual mining turd (no part of the turd coupon is at fixed % rate. X Mh/s only aka turd holder can enjoy all the risks) are perpetual losers unless BTC difficulty starts to drop and earnings per Mh/s start to go up)
Let's agree not to derail this thread into an argument about the merits of the mining bond model.

But as you can see OP, margin trading for GLBSE is in high demand as there are people believing some of the assets are currently significantly overvalued.

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July 22, 2012, 05:12:09 PM
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And keep in mind, that every perpetual mining turd (no part of the turd coupon is at fixed % rate. X Mh/s only aka turd holder can enjoy all the risks) are perpetual losers unless BTC difficulty starts to drop and earnings per Mh/s start to go up)
Let's agree not to derail this thread into an argument about the merits of the mining bond model...

I had no intention of getting into that Smiley
Reason, I actually mentioned it, is simple: OP must understand the need for different margin requirement for different types of securities.
If GLBSE had types (is it going to) it will make life a bit easier. He has to look at every security he is willing to accept as a collateral for a margin loan and probably publish this list to eliminate unnecessary confusion. IPO's, most turds and seldom traded instruments are good candidates for the "no margin" list.
Yes, margin trading can be fun but it can turn in to real nightmare really fast. Double your income, quadruple your loss. Especially on a young market like BTC/GLBSE where most bids/ask do not represent any real interest for a trade. Those "orders" are usually set by scumbag bot runners. It is really easy to confuse this with liquidity. Bots and their quotes are like cockroaches in a dark kitchen - turn on the light and they are gone.

While reading what I wrote, use the most friendliest and relaxing voice in your head.
BTW, Things in BTC bubble universes are getting ugly....
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July 22, 2012, 05:43:30 PM
 #20

This is an interesting idea, but I think for the risk that the lenders are going to be taking, they would have to charge sky high interest rates. (And maybe this is feasible). There's a reason brokers don't offer margin trading on penny stocks and junk bonds.

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