And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
this part can't be correct. the way i understand it is that the customer gets his order executed
before Zhou has a chance to hedge on mtgox. this is why the spreads are higher on Bitcoinica to acct for slippage or his increased risk of letting you fill first. example:
if mtgox bid:ask is $4:$4.10 then
Bitcoinica might be $3.80:$4.30 thus
you, as a customer of Bitcoinica, can short at the ask of $3.80 with a limit order and you will get it filled immediately. the $0.20 difference is what Zhou's algorithm has figured to be a safe cushion to give him time to hedge on mtgox and sell his btc at or somewhere btwn $3.80 and $4 so he doesn't lose money.
in your example, you state that even if you short at the ask price of $3.80 it won't be filled until and if Zhou is able to sell a corresponding amt of btc on mtgox at $3.80. if that was the case then his spreads should never be higher than mtgox's since he doesn't assume any risk.
correct me if i'm wrong.
Well, the system hedges right after the order execution, and that's why we call it "guaranteed liquidity". And also, the system has to figure out whether it's necessary to hedge at all.
Bitcoinica is not a Mt. Gox interface because we want to be as independent as possible.
We don't have to ensure profits and accuracy on every single trade. But much more than 99% of the time, we can hedge at exact prices that we aim to. If we can ensure these:
- Slippage is highly concentrated in a few seconds of a day
- Customers' orders are distributed across all times
We have virtually no risk.
The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.
Your theory of "hedging erosion" never happens in our experience. During 9/11, we lost about $10 due to slippage when the price suddenly spikes 50%. And we made 100x back later. It's peanut right?
A clear-minded person won't question the business model of the one of the most successful Bitcoin businesses ever.
ah, so i was right and Mushoz's example is wrong. he thinks customer orders don't get filled until you've already hedged. there IS risk when you let the customer go first.
and now you admit that you might not even hedge. there's alot of judgement that goes into those algorithms that could be wrong in a violent market.
