Topic: Building a great Bitcoin exchange, part I: transaction fees - page 2. (Read 3029 times)

Tens of millions of trades per second sounds quite massive. London stock exchange seems to do some 612,000 trades per day (http://en.wikipedia.org/wiki/London_Stock_Exchange), which is about 10 per second. Then again, NASDAQ has 1.8 billion trades per day (http://uk.advfn.com/StockExchanges/about/NASDAQ/NASDAQStockExchange.html). So there's some catching up to do.

Millisecond latencies for trade bots will also require some significant investments (practically you need to support colocated servers). But given bitcoin's growth rate so far, I wouldn't be surprised if this happened sooner than later.

This is one of the main points we plan to tackle. Ideally we'd be able to create a modular system where the trading component can be changed to a faster one, or the work split between multiple nodes, without anybody noticing (after simulations verify that it works properly and is more efficient). Significant engineering effort will be put into this.

Volume discounts make sense to me, you are using their service a lot so they reward you. As for a fixed fee, that makes it awful hard on small traders if it's going to be high enough for the exchange to make decent money. I think a percentage makes more sense, the more money you are putting through, the more you pay.

I think MtGox charges too much, but Bitfloor is a good example of a fair fee system. They actually have a negative fee if your offer is not immediately accepted, which inventivizes offers not likely to be accepted right away so people get a better picture of the market.

I have a suggestion. Fees are a changeable model, provided you code properly.

What will hamstring you from day 1 to the grave will be if your system falls over under load. Gox is big only because it is big, but technically speaking it is a piece of garbage. 

When the normal stock markets can provide sub-microsecond latency market depth data across tens of millions of trades per second, it puts to SHAME the fact that Gox falls over when it gets a few thousand trades in a 5 minute period.  Unacceptable lag is one way you can improve on Gox, as well as build a user interface that's actually, you know, usable.

Start with the basics.. you really need to have something to offer.  Insurgents cannot compete on the same selling points as incumbents, you have to change something significant.

I understand the need for trust, and I suspect it will take some time. If/when we start, we're probably going to be very careful about it.

Still, I want to get some things right even before starting to build that trust, such as the effect of fees on how the economy works. (I.e. should cancelling orders be punishable by a small fee to avoid obviously bogus orders, and why would that be a bad idea? I don't think anyone has fees for cancelling orders right now.)

To be successful, one needs a deep understanding of the good and the bad in the current state of art in exchange user experience. I don't want to build a merely trustworthy exchange; I want to build a great one.

Its not about transaction fees, it's about TRUST. A "great bitcoin exchange"="an old, established and trusted bitcoin exchange". Thinking that a great bitcoin exchange is a "cheap" one is a mistake. It doesn't matter which software you use or the nice friendly interface of your future exchange. All it matters is that 2-3k bitcoin owners trust you ...and that means many, many months of work.

So, recently I've been thinking a lot about how to build a great Bitcoin exchange.

There are some topics I would love to hear your opinions on, and I'll start with:

Part I - transaction fees

Let's skip the question of deposit/withdrawal fees for a second, as I believe they are of secondary importance.

Many popular exchanges charge relatively high transaction fees: around 0.5% seems to be a common starting fee, and if you exchange a lot, it can go down to around 0.2%. btc-e.com charges 0.2% (no volume discount), and bitcoin-24.com charges absolutely nothing (they make their money from deposits/withdrawals, it seems).

Apart from bitcoin-24.com, it seems like a far cry from the real stock exchanges, which can go as low as 0.01% (apparently they have some sort of volume discount there, as well). I wonder why. Is the volume just not there?

As an aside, the volume discounts remind me of progressive taxation. What is the justification for them? Why not just add a fixed percentage fee to all trades, say 0.2%, like btc-e does? Even better, why not just add a fixed fee to all trades, say 0.1 USD (or 0.1 EUR, or 0.001 BTC)? From a software engineering point of view, a transaction is a transaction, and to broker, a bigger transaction is no more costly than a smaller one. I'm sure there's some psycho-socio-economical explanation this, but I'm waiting for someone more knowledgeable to articulate it for me.

It's interesting that we have an exchange with zero transaction fees (bitcoin-24.com). Do you think that's a good thing? Will it not lead to the proliferation of high-frequency-trading bots that consume your precious computational and bandwidth resources at the expense of real users?

(Even more interesting is that currently, there's a 18.99 USD spread in bitcoin-24.com, even though it's the second most popular market, according to http://bitcoincharts.com/markets/. I would have postulated that zero commissions - combined with a decent volume - would lead to zero spread and an infinitely efficient market, by some intuitive logic of mine.)

All in all, I'd like to hear your opinions as to what kind of features you're looking in an exchange and where the current exchanges are lacking. Especially if you're located in Europe and would be willing to trade in euros.