Topic: The Mt Gox Master Plan - page 2. (Read 6678 times)

I prototyped an exchange before abandoning the idea due to legal concerns.   My plan to 'compete' with Mt. Gox was to 'auto-magically' arbitrage between our two sites anytime the price difference was greater than Mt. Gox's fee.  I would charge a much lower fee to cause people to switch to my site, but make money on any price differences between the two sites.  This would give the new, 'smaller' site a larger 'volume potential' than Mt. Gox because it would represent the sum total of all of my customers plus all of Mt. Gox's. 

In a free market this kind of arbitrage is possible by any new entrant and would quickly undermine any even marginally profitable exchange.  Ultimately, all exchanges would end up performing this kind of brokering for their customers.

A standardized inter-exchange bid transfer system would help, but is not necessary.

I don't follow why people would want to be in the biggest market. If they're trading BTC for USD, they want to be in whatever market pays them the most USD for their BTC (or failing that, the lowest transaction cost), assuming it can accommodate their volume. You may not get the biggest trades at first.

You are saying the risk of these hidden profits is enough that we should design exchanges and policies based on it, otherwise this whole discussion is mental masturbation. Then you are saying we won't be able to know that they exist with enough certainty to risk money on it. You can't have it both ways.

Either the claim that there could be massive hidden profit can be supported by facts or it cannot. If it cannot, then why are we discussing it? Let's worry about aliens taking over bitcoins -- that also can't be supported by any facts.

It wouldn't. That's why the hypothetical of the large exchange raking in dough on insider information is implausible. If the hypothetical were true, as I argued, a smaller exchange would be able to offer much lower rates.

No, not at all. The higher the profit margin, regardless of the source, the easier for people to enter the field.

If McDonald's was barely making money, you'd have a hard time competing with them. You'd have to be almost as efficient as they are just to break even. But if McDonald's was raking in the dough hand over fist, you could be profitable even if you couldn't match their economies of scale.

Right, but in the hypothetical, all else is not equal. In the hypothetical, the big exchange is drastically overcharging and raking in money hand over fist while the small exchange only needs to make a reasonable profit (though would prefer to make more if it could, of course).

The barriers of entry are indeed huge, beacuse everybody wants to be in the biggest market. You cannot suddenly bring everybody to the other market. Also when potential competitors make a cost benefit analisys they would probably not be able to take into account the profits for using hidden information. This is by definition hidden data.

Are you from the Chicago School of economics?

No, I mean the quasi-monopolistic situation where the exchange is profiting significantly from its own inside information. You can have a monopolistic situation if, for example, the exchange cuts their rates so low, operates so smoothly and reliably, and makes so little hidden money that there's no point in bothering to compete with them. But if they were making huge profits, the incentive to undercut them would likewise be huge. (Assuming no significant barriers to entry.)

"This pretty much can't happen.". What do you mean? The quasi monopolistic situation? You must be kidding.

Why would a smaller Exchange be able to offer much smaller rates that a bigger one? There is a concept called economies of scale. Moreover if the bigger exchange makes profits from insider info and volume, there is even less chance a smaller one will be able to compete in rates.

And all else being equal, I would allways prefer being in a big exchange, because there are much more oportunities for supply to meet demand. Price wise and volume wise.

This pretty much can't happen. If this did happen, I could open a competing exchange and charge a 0.1% fee. Their monopoly would evaporate rapidly, and I could take over that continuous transfer of wealth.

If they can get a better rate on a smaller exchange, why would they prefer the bigger one?

(created by mistake)

You previously wrote "Hidden information is very bad for a market.". And I agree. So consider this: a quasi monopolical exchange that has access to information that the rest of the market has not, is in a position to use this information to gain profits from the use of this hidden information. This is in effect a continous transfer of wealth from the rest of the market to the controller of the exchange. This wealth transfer is not due to their useful work as an exchange (0.65% fee) but due to hidden information they only have access to. This hidden information does not benefit the rest of the market. Opennes of information would benefit the market as a whole, beacuse we would not have this transfer of wealth due to monopolization of information. This of course is only one of the drawbacks of this private closed monopolistic exchange.

You have to take into account that the natural tendency of a global market like this would be to have only one big exchange, as everybody wants to trade where the biggest market is. So this is a feedback loop that kills the small exchanges and feeds the biggest. This will in the end give too much power to the exchange and would endanger the original goal of bitcoin of being a descentralized and free currency.

As long as bitcoin is mainly a speculative commodity that depends on exchanges, this threat is very real. Once bitcoin (hopefully) becomes mainly a currency/money that you can buy most things with, exchanges would loose power as people would not need to exchange bitcoins for dollars or other currencies. But I dont see that the world will widely accept bitcoins for most goods and services soon, this cultural change will take years or decades. In the meantime, lets not allow exchanges accumulate too much power over bitcoin.

For now, exchanges are almost the only interface between bitcon and the real economy, this is too much responsability and power to be in the hands of one private closed quasi monopolistic exchange. We need to find a better solution than honours the vision of bitcoin as free descentralized currency.

I couldn't care less whether an Mt.Gox associate, or Mt.Gox itself, had an account on the site.  I DO care if this was the compromised account. The have a clear conflict of interest in the decision to roll back all the associated trades when it's their money being lost.

For future reference, at what point will the theft of BTC, and subsequent sale, result in a rollback?  Is it a size threshold?  A market impact threshold?  Or simply a question of who owns the account?

You know what the main problem with this Bitcoin forum is?

It is the number of paranoid fantasists that are attracted to it. I can't wait until more normal, rational folk get involved.

especially with the 1.3% Mt. Gox was putting on each trade during the entire operating weekend.

Yes, it benefits the market generally. It may harm specific groups of people, particularly when it's a violation of a confidentiality agreement, but it benefits the market generally.

For example, when a CEO trades against his own stock based on inside information this hurts his stockholders, and he has a legal obligation to protect their interests. But it benefits the market generally by appropriately reducing the value of the stock as quickly as possible. (The CEO benefits, the market benefits, the stockholders suffer. The crux of the crime is that the CEO has betrayed his stockholders.)

If you believe otherwise, feel free to present an argument.

So by your judgement, insider trading benefits the market generally! Ha ha...

If you know the price of bitcoins will go down, you sell them. This makes the price of bitcoins go down sooner than it would have otherwise. It also means they won't go down as sharply. This reduces the volatility in the market and benefits everyone. You can sell against a slow drop to protect yourself. It's much harder against a sudden drop.

We *want* people to trade on any information they have as soon as humanly possible so the market can reflect that information. Hidden information is very bad for a market -- it means people are paying too much or getting too little.

I think you dont know what you are talking about. 

We would hope they wouldn't, because it benefits everyone for them to do so. By acting on secret information, they make the market price reflect that secret information, effectively publicizing it.

It works the same way as insider trading. Say you know a company's stock is likely to dip. You sell that stock. This causes the price to dip, communicating to the market that the price is too high. This cushions the drop so it is more spread out rather than sudden, benefiting the market generally.

Yeah and actually mtgox is a subsidary of the bilderberg group  

This is not a question of IF. It is obvious they can profit form information only they have. I am not saying they are using this information for personal gains right now, but hey, who could avoid the temptation in the long term?