Topic: [MPEx] Announcing interest on balances held. Also margin trading available. (Read 1407 times)

Wow, strike that. Psy, you missed two. What sort of two bit no stamina failtroll are you after all?

PS. All responses must rhyme.

Sub. Margin trading peaked my interest.

Thank you, this has been committed

That explanation makes so much more sense than the one in the FAQ. This statement:


makes it sound like the costs 1 BTC (in which case, it never makes sense to make an option with 1 BTC strike). In reality, the 1 BTC is just collateral which will be returned if the option expires or given to the option holder if exercised (in return for the strike price, converted to BTC). The 2% fee is only mentioned much further down.

My suggested edit would be:

This is correct. It does miss some points, to wit:

1. On MPOE the fee for selling was 1%. On MPEx it is 0.2%. This is simply due to the significant drop in clerical costs necessary to enter and clear transactions.
2. On MPOE the traders selling to the market (so not to MPOE itself) had to enter their bids via email, which adds a delay. On MPEx this is done instantaneously and with much less hassle. On MPOE there was no order cancellation, this exists in MPEx.
3. Traders could still write their own options on MPOE as long as they had the backing, nothing changed in that respect.


This is correct.


This is also correct. As long as you don't sell/buy into an MPOE order then MPOE is no party to your transaction.


SPLIT creates CALL and PUT pairs, at no cost. Thus if you split 100 BTC when the BTC/USD is 5.0 and ask for a strike of 5.0 you will receive 50 O.BTCUSD.C050T and 50 O.BTCUSD.P050T.

MKOPT creates an arbitrary number of either CALL or PUT options, at a cost of 2%. Thus if you want 100 O.BTCUSD.C050T you will be charged 102 BTC, of which 100 are held in reserve and returned upon those options' expiration out of the money (in full) or exercise (in part).


There is no interest paid on balances held in escrow (to cover for written options). Interest is paid exclusively on BTC balances held as cash in your account (there is no interest paid in BTC locked up in buy orders in the book either, for instance).


This is true.


This is also true, of course it speaks of a somewhat (at least in bitcoin terms) distant past.

December 2011 for instance saw a total exposure over 5k contracts, which was entirely financed by Mircea Popescu. While it is true that March 2011 saw total exposure of ~3.5k contracts, which is significant, and April is on track to probably beat that, there are significant amounts deposited in bonds (for instance in March Mircea Popescu himself didn't get to lend a single bitcent to financing MPOE).

This would mean that in terms of exposure to the underwriting done by MPOE the record of December 2011 might take a while to beat. As a general principle I understand the policy on this subject to be "superficial tension", which is to say in the ideal case Mircea Popescu's capital is right there and available but not really actually needed. Obviously like all macrofinance it's a balancing act.


This is very true, and it is in recognition of this very valid and very important observation that I am here to begin with, that a lot of effort is being invested into rather elaborate (and, to be fair, standards-establishing for the bitcoin community) reporting and so on.

If there is ever to exist real bitcoin economy, and if bitcoin is ever to be taken seriously as a medium of exchange, customers do indeed need to be very concerned about what their counterparties (and not just MP) do with the bitcoins, what the business plans actually are, what the quality of published information is and so forth.

I would dare say that the most important thing any one person with over a hundred bitcoins to their name can do right now, today, to ensure a future for bitcoin is precisely to take every care to make proper assessment of all counterparty risk they are taking on, to insist on disclosures and so forth.


Absolutely. Synthetic assets of that type are probably the best example of an instrument that profoundly involves the credit of the issuer. Let's pause a moment and take note of the truly extraordinary circumstance that such fiat issuance is beyond the conceivable in the "real" world of fiat currencies, as maligned as they may be, yet it is not only common but almost the norm in the "realer" world of bitcoin, which isn't fiat (and has no inflation - other than the 35% a year from mined inflows ofcourse). In fact Mircea Popescu's issue of PURE.SYNTH is... not quite as unbridled, so to speak, as a large swath of securities or instruments purporting to be securities at the present moment floating about.

Then again bitcoin is young.

It is true the same as before that MPOE and MPEx customers have counterparty risk with Mircea Popescu, and the continued functioning of both rests on him continuing to make good on his obligations. Nothing has changed, whether MP pays interest or not.

When MPOE was small, the risk of having MP as the "lender of last resort" was small, as any losses he incurs were small relative to the value of his reputation. As the various MP enterprises grow, however, customers should be more concerned about what MP does with bitcoins so they can make a proper assessment of the counterparty risk they are taking on. This becomes especially true as MP issues more and more assets (e.g. PURE.SYNTH, which is not backed by underlying assets.)

Thanks. That's clears a fair bit up. Could you please clarify how the options work on MPEx. Or see if I have this correct:

MPEx now lists a bunch of options with the same terms as those on MPOE. On MPEx, traders can now more easily set their own prices and even write options, so long as they have significant BTC backing, so there is no counterparty risk.* MPOE acts as a market maker and any options it writes are treated in the same way as if they were sold on MPOE (i.e. MPOE bond and shareholders share the risk of loss or the benefit of gains). If I split some bitcoin into call and put options and sell them, then MPOE has nothing to do with this transaction, as the transaction is between me and the trader who bought the options, and MPEx acts just as the escrow to ensure that the option is fulfilled.

Is that a fair description?

* Note: I'm still unclear on the MKOPT command and how exactly it differs from the SPLIT command, but that's a question for another post/thread.

Side question: Is interest paid on BTC balances held in escrow to cover the potential for options being exercised, or on BTC held for unfilled orders?

You're mixing non miscibles. Granted, the situation has grown quite complex - it's almost as if we were doing high finance over here. Let me try to shine some light on the matter:

MPEx is the stocks (& options) exchange. On it, people trade these. All balances carry the full guarantee of Mircea Popescu, and are held at no risk as far as the trader is concerned. The interest paid on balances reflects simply the fact that while someone holds a claim on Mircea Popescu as proven by an MPEx balance, that someone doesn't also hold the corresponding bitcoins.

MPOE used to be an options-only exchange, but due to superior technology available on MPEx it has pretty much moved there, as an options MM / trade bot (the original site still exists, is working and takes orders from customers that don't want to or can't trade on MPEx, it's just that a majority of its customers moved to MPEx too). It is still financed exactly as originally described, the risk and rewards are divided exactly as originally described.

In short: the traders on MPEx derive no benefit and shoulder no risk arising from the activity of one of them (MPOE). If indeed Mircea Popescu uses deposited bitcoins to cover options losses, or to buy himself a toothpick or whatever else that'd be his problem and in no way degrades the claim MPEx customers have to their full balance. Bondholders of MPOE on the other hand hold a claim to their full principal deposited with MPOE plus interest if and only if MPOE closes in the black. If it closes in the red they are liable proportionally as described in the original IPO.

That said, one important point is that the exact numbers are tentative - there's no guarantee that interest on MPEx balances will stay at 80% MPBOR forever. We're doing some measurements, experimentation is the mother of science etc. It's also possible that the maximum rate on MPOE bonds (2%) is excessively small and might move in the future. This is still a contentious point in the board and they're yelling at each other on pretty much a daily basis about it since at least February. On one hand 26.8% APR is a pretty hefty rate, especially for a supposedly non-inflationary currency. On the other the market signals are pretty clear that it's very low, seeing how the utilities (miners, basically) are customarily doing significantly higher rates. The way in which capital reserves are calculated for MPOE is certainly a hack introduced for speed and ease (total contract exposure, as opposed to the more sane maximal contract exposure) and will be probably revised in the future.

The question of a merger between MPOE and MPEx is also on the table, mostly on the grounds that there's significant similarity of risk profile (ie, for a counterparty it's unlikely that one fails while the other stands, but moreover both stand or both fail, so they are practically the same company in this sense) and little point in having separate issues floating about. In any event the merger would be in equity only, leaving the two to operate as independent profit centers or somesuch.

I hope you had fun reading

Great!

Does this mean that balances are now held at risk, or there is fractional reserves? That is, balances may be used to cover losses on option contracts? Or are balances covered by an MP guarantee, in return for the (at least) 20% (relative) spread between the rate paid on balances, and the interest earned by MP as lender of last resort?

I. Interest. Starting today MPEx pays 80% of the MPBOR (MPOE Bonds Offered Rate hehe, the interest rate as fixed by the monthly bond auction detailed here). This currently stands at 1.99% per month. The balances update once a day, so you should see the satoshis trickling in already.

II. Margin. MPEx now accepts margin trading from selected traders. In order to qualify one must have a solid WOT rating and considerable trade volume on MPEx. Amounts and rates negotiable, you will have to talk to mircea_popescu (usually in #bitcoin-otc-eu, or alternatively email) to get yours.

Margin doesn't work in the "traditional" way, moreover you get the lump sum added to your account. Note that you will be required to gpg-sign a commitment to repay with specific terms. All withdrawals made while margined will go towards reducing the margin first.

That'd be all. Have fun trading!