Topic: How profitable are exchanges? - page 8. (Read 15755 times)

APSJEX.com offer: The fee for input/withdrawal of BTC – 0%; Trading Fee as low as – 0.2%; Minimal round lot – no minimal amount; Maximum withdrawable sum – unlimited; Bank fee for money transfers – 1.7%;

That is why there are so many scams in bitcoinland...  Most bitcoiners aparently expect from exchanges and bitcoin ventures only the same level of business ethics that they expect from a drugs dealer... 

But an exchange that does unethical things will of course "put the clients' money in question", at the very least by spoiling their "luck" at trades.

An exchange that uses a dirty trick against some other client may next use a different dirty trick on you.  That is why one should not tolerate ANY unethical behavior from  them, against ANYONE.  If clients don't mind other clients being scammed, the exchange will have no reason not to scam them, one by one.

That is plenty of time to take advantage of the clients, big or small, even without any fancy psychological heuristics.

Say for example that the current spread is 600$ -- 610$.  At 10:45:00 Alice places a buy order for 10 BTC at 605$.  At 10:45:03, before Alice's bid gets posted to the world, Bob places a sell order for 10 BTC at 600$.   Carl, the exchange owner, then inserts between the two orders his own sell order for 10 BTC at 605$, and his own buy order for 10 BTC at 601$.  Only then he posts the trades to the world, namely

  10:45:01 sell 10 BTC at 605$
  10:45:03 sell 10 BTC at 601$

The first trasaction being from Carl to Alice, the second one from Bob to Carl.  Both Alice and Bob will be happy with the liquidity and the result, but Bob will get only 6010$ for his coins.  Whereas in a honest exchange the only transaction would be

  10:45:03 sell 10 BTC at 605$

from Bob to Alice. In this case Bob would get 6050 for the coins.  The 40$ that Bob failed to earn in the first case are pocketed by Carl.

Certainly many other such tricks are possible, e.g. when a client places a single buy order to scoop up N sell orders at different prices, Carl can run ahead and buy the N-1 lowest sells, then place a single sell order just below the last one.  Or whatever.

That does not seem to bother the typical bitcoin scammer.  I don't know if Danny Brewster got front page coverage anywhere, even in Cyprus; and he obviously did not get much worried about it.  The dozens (hundreds by now?) of lesser bitcoin scammers got no coverage even in the "bitcoin media".

As I said, one would still require a trusted audit to certify that clients are real and that each client got a single client code.  The dirty tricks that I imagine are happening would be thousands of small "thefts of good luck" per day, as illustrated above, that could not be masked by using a few friendly clients in place of Carl.

Would you prefer that exchanges be regulated like this? Having unethical tricks be crimes would deter exchanges more then simply opening their trading logs like this. IMO people would still utilize an exchange if it was well known that it was doing unethical things that didn't put their money in question nor were illegal. It was no secret that gox was having money problems (the extent of them were not known), and that it had many security breaches but they were the largest exchange for a long time after Bitstamp and BTC-e started seriously competed with them, and when they were de-throned as the largest exchange they still had a lot of trading volume by any measure. IMO money and security problems is worse then an exchange having unethical practices. 
Yes an exchange does know their customer's orders before they do, and they also know when there will be large buy orders in the near future (when they receive fiat deposits people who make the deposits will generally buy bitcoin). For all customers the time that they have to front run their customers would be seconds at best. The only type of customer that this could protect would be the whales (other orders would simply not be large enough to move the market) and the possible person who could front run would go from being the exchange to other market participants.
A businessman would not do it because it would be unethical. Even if there is no way for the public to audit certain things, there is also the risk that someone would leak certain information. Most employers tell their employees to act in a way so that they would not be ashamed if what they did appeared on the front page of the newspaper.

What makes you think that all exchanges are front-running their clients?
What would prevent the "friends of the house" from creating multiple accounts and only using each account for one trade? I would think it would be the expected behavior for most accounts to only have one buy or one sell transaction then become dormant as people would cash out of their bitcoin or buy bitcoin as an investment in one lump sum. 

That is because stock exchanges are strictly regulated and audited by the SEC, and many unethical tricks are crimes with stiff sentences.   I was assuming that bitcoin exchanges would remain free from such regulations for a while still.  If they are to be regulated the same way as stock exchanges, then the UCCs may add little to public confidence (but would still be very useful for market analysis).

That is actually very wrong.  The exchange knows the client orders before other clients, so it can scoop up good trades that otherwise would have been exploited by them.  (I believe this is what is called front-running, yes?).  Any money that the exchange makes this way comes from the pockets of their clients, but they would not notice it -- they would just have less luck than they would in an honest exchange, and as a whole they would lose more money than just the trading fees.

I suspect that all exchanges are doing this (and/or other dirty tricks). If something is not illegal, cannot be detected, and is extremely profitable, why would a businessman not do it?

A standard audit of the books and accounts would not detect this.  But with certfied UCCs in the logs, people will notice that one client (or a few "friends of the house") will have extra luck and will always seem to know juicy orders beforehand.

This is not something that even our stock market in the US has. In general most people (IMO) trust stock market exchanges and have confidence in the market.

What kind of behavior by exchanges do you think this would stop/allow to be discovered? If you are talking about an exchange trading for it's own account, then there is really nothing wrong with this as long as they are using their own money. If you are talking about an exchange having enough reserves then the exchange could simply have their books audited by an outside auditor   

The intended purpose of the unique client code idea was not to prevent criminal use of bitcoins by clients,  but to prevent certain unethical behavior by the exchange, possibly with complicity of some privileged clients.  (Of course it woudl only work  if the uiqueness of the codes was certified by independent, reputable auditors.)

Unique client codes would  also immensely improve our knowledge of the market.  For instance we could tell how many coins have been bought for each given price and not sold yet; that would provide an estimate of long-range liquidity that may be much more rreliable than the order book.  We could tell whether the market is concentrating or distributing bitcoin ownership.  How many active traders there are in each exchange.  And much more.

this would defeat the purpose of having client codes as it was said previously that they would be installed to make sure no one is doing anything nefarious and a criminal could simply use an exchange that does not use these client codes

If a whale is buying a lot of bitcoin they will need to do it gradually, over time (over hours or possibly even days for very big whales). The whale will likely drive up the price regardless if others know that he is buying so his maximum price is likely somewhat above the price when he is just starting to buy or else he would never get his order filled.

There would be no reason for other small traders to stop buying as a whale buying would not stop them. All things being equal they would continue to buy.

Unless both whales are trading at the same time then this would not be the case.

Yes, many traders would not like even that limited increment in transparency. But others may like it, if it makes them feel more confident about the exchange.  Exchanges with and without unique client codes could coexist, so that clients could choose.   That is something that the market (or should it be the meta-market?  ) seems capable of deciding.

But I don't think that they would be necessarily inconvenient, even for big traders.   In your example, other traders would not know whether the buying whale has a preset max price, or how much he intends to buy; or whether the small traders will keep on buying too.  And such a buying whale would be sharing the market with many other traders -- including big selling whales, for which the same reasoning would lead to the opposite effect.

Moreover, it is a zero-sum game (in the short run at least), so any change in the rules will have no net effect on profits when averaged over all traders.  To evaluate such a change one must use other criteria, e.g. whether it seems more "fair" to traders and thus avoids them blaming the exchange for heir bad luck.

This would get a lot of people to stay away from exchanges, at least people who plan on buying/selling large amounts. If it was clear that scrambled id "1234" was buying large amount of bitcoin then other traders could also buy expecting the large buyer to further drive up the price. The result would be that this large trader essentially pays a higher price then if several small traders bought the same amount at the same time

I have noticed some annoying inconsistencies in Bitstamp's trade log, as reported by BitcoinWisdom (in the lower right sub-window of the clart).  Some past entries of the log change quite a bit when the chart is hard-reloaded. More details here.  Note, for example, that in this section of the logs one trade for 0.036 BTC became 0.34 BTC after reloading the chart.

The problem seems limited to Bitstamp.  BitcoinWisdom's owner says that Bitstamp's chart data API does not provide the trade type ("buy" vs "sell") so he has to guess it somehow; and the entries also have some timestamp/order problems that explain why the ordering and timestamps change after reloading. I don't understand yet how those shortcomings of their API could cause the BTC amounts to vary, as noted above. Anyway, they should fix those bugs, otherwise clients who notice those retroactive changes may get the wrong (or right?) ideas.

If the Shrem Karpeles & Friends Foundation (aka Bitcoin Foundation) was worried about building public trust, they would define minimum transparency standards for exchanges, including full and immediate disclosure of the complete history of bid/ask orders and all trades, accurately ordered and timestamped; and they would monitor exchanges for compliance.  But if pigs had wings...

One thing that would improve transparency a lot would be to attach a scrambled client ID to each bid/ask submission, and the two IDs to each trade.  That would not reveal the identity of the clients, but would allow other clients to check the logs for suspicious behavior by other clients or by the exchange owners.  (Professional auditors could later certify, under NDA, that those IDs are mapped to the actual clients in 1-1 fashion.)

It sounds like they may be using customer funds to trade. This is very risky and unethical as it is not the exchanges money to be risking like this, especially without disclosure.

Where do you live? I think you are making up the number and pulling off data from your ass.

For exchange volumes: http://markets.blockchain.info/ The 24 hour volumes in USD will display at the top for the major exchanges.

How do you define "local trade"?

Almost every (if not every) business that accepts bitcoin does so because of economic reasons

What is the daily volume on bitcoin transaction?

Do they take bitcoins, or do they take dollars from BitPay-like companies (that sell your coins and give the dollars to the merchant)?

Many countries have small businesses that take Bitcoin.  Withing 15 miles of my house there are 67 Bitcoin businesses.  The large companies are the holdouts.

I have yet to see local trade being done using bitcoin due to economic incentive. If you know any country with population that use bitcoin on everyday transaction, please kindly share the news.

This recent interview with Bobby Lee (CEO of BTC-China) is quite relevant to this question:
https://bitcointalksearch.org/topic/m.7510644

They could potentially pay some of their expenses in BTC