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.
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.
Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!
Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.
The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.
A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.
What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.
And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.
Mushoz: can u translate this?
It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.
what if the spike comes at exactly 4 sec after the customer pushes his button? what if a series of ramps occur?
i know, i know; he says he only executes 50 BTC at a time but in his explanation above he says 50, 100, sometimes 150 BTC. which is it?
If the spike comes exactly 4 seconds after order placement, we can be sure that the customer was not intending to exploit the spike because no one actually knew.
So it can be 0, or 50.
100 and 150 are possibilities when multiple customers place order at the same time, and it's extremely rare.
what if i'm the one who pushes the button on Bitcoinica, counts off 4 sec, and pushes the button on mtgox creating the spike?
not if at a given pt in time both gox and bitcoinica have respective asks say @ $4 and $4.10 due to low activity in the market. example:
i have accts at both gox and bitcoinica. i push the buy button at bitcoinica to buy say 100 btc, count off 4 sec to secure the buy @ $4.10, then push the mtgox buy button to buy whatever it takes to create a spike to $4.5 before bitcoinica has a chance to hedge @ $4. once bitcoinica adjusts its bid to say $4.4 i then sell those same 100 btc on bitcoinica for $4.4
