Тег: Exchanges

A question about stock exchanges

Investments and exchanges are the foundation of the entire market economy today. Essentially, in the absence of a regulator in the form of the state, traders would be able to gain virtually unlimited power: they could inflate prices or, conversely, crash them to zero, destroy some companies and promote others. So the question is: how will exchanges work in ancap? What alternative will be offered to investors instead of the stock exchange in the event of its liquidation? How can the dominance of traders over the market be prevented?

Muller

The order book is, in fact, the quintessence of the free market. Pure supply and demand, stripped of any rhetorical fluff. It is not for nothing that the foundations of Austrian economic theory were laid by a stock market observer. So, of course, in a free market economy, the role of exchanges will only strengthen.

What are the main dangers facing an investor on the exchange?

First, these are possible exchange manipulations.

In the world of stock exchanges, blatant manipulations have become a great rarity because they care about their reputation. If we encounter any restrictions from trading platforms, these are usually requirements of external regulators—for example, regarding the suspension of trading in a situation of market panic. I do not know which exchanges companies will prefer for listing their shares—those that provide for an automatic stop of trading during price spikes, or those that guarantee continuity. Let the consumer choose.

In the world of cryptocurrency exchanges, attempts to protect against exchange manipulations led to the emergence of demand for decentralized platforms, where you cannot fake volumes. I would not be surprised if over time stock exchanges are also pushed aside when crypto-tokens begin to take the place of company shares.

Secondly, possible insider manipulations.

This is, in fact, a problem not of the exchanges, but of the companies that are traded on them. Even now, private companies are taking measures to prevent such machinations—through non-disclosure agreements for insider information that provide for serious payments for their violation, as well as through moratoriums on trading company shares for its employees in periods shortly before the publication of regular reports. The absence of such measures will simply be taken into account in the share price of specific companies as an additional risk factor.

Thirdly, market maker manipulations—traders who have access to very large capitals. This is the factor you are writing about.

Here, one can only say one thing: if you want to be indifferent to such manipulations—simply do not take loans secured by shares. Then you will not have to dump shares due to a margin call if someone temporarily crashes the price. No market maker is capable of completely zeroing out the shares of a prosperous company: no matter what panic rumors he spreads, no matter what volumes of shares he dumps onto the market, if you simply forget about your stake for a month or two, you will lose nothing; the price will return over time, it’s just that some will sell securities during this time and some will buy. It’s not even a fact that the trader who started all this will necessarily profit. He is not the only one—a large movement will attract others, and they will play it their own way.

So, there is no question of trader dominance in a developed market. This is simply their habitat. The more of them there are, the better the life of the companies traded in this market, and the harder it is for traders to manipulate the price of assets.

In general, exchanges are simply a tool through which it is convenient for a seller and a buyer to find each other. This is not some self-sufficient entity. If the tool works correctly, it will not cause damage to real companies in itself.

Consultations were used in the response from Srpski, as a gesture of gratitude he asked to reference his channel “Serbian Divergent”.

Regulation of the securities market

I stumbled upon an article describing the beneficial impact of the SEC on the securities market. What’s the catch?

анонимный вопрос

Among libertarians, a certain consensus has generally formed that the Great Depression was caused not by mythical market failures, but by the fact that the Federal Reserve, created in 1913, pumped the American economy with money, creating a financial bubble. Subsequently, President Hoover, and then Roosevelt, did not allow the bubble to deflate peacefully, but began to steer the economy manually. For instance, as early as 1932, Hoover demanded that exchanges limit the ability to open short positions, and Roosevelt, in 1934, established the SEC—a federal agency that interferes with the free trade of securities.

The article states that the SEC ensures confidence in the securities market because it requires companies listing their securities on exchanges to fully disclose information about themselves.

In 2018, there was an ICO boom. A huge amount of dollars were spent buying Bitcoins to buy Ether with those Bitcoins, and then to invest in tokens created on its blockchain. The SEC did not regulate the process at all; most of the investments proved to be failures, but some things took off, and some will certainly take off in the future.

What does the ICO boom, during which token sales of millions of dollars occurred in a matter of seconds, tell us? That there is also a high demand for high-risk investments. An investor does not need some office to decide what to release onto the market and what to keep out. He only needs to know which assets are high-risk and which are relatively safe, and then he will decide for himself what to take. In other words, market demand is not for a regulator, but for rating agencies and good arbitrage. But the state, of course, cannot help but spoil things here as well, because, as we remember, the 2008 crisis happened precisely because, as a result of government pressure, the largest rating agencies assigned the highest reliability ratings to derivatives backed by junk bonds, and no SEC saved the day.

In conclusion, I would like to recommend Rothbard’s book “America’s Great Depression”, which provides a detailed theory of the economic cycle and analyzes the beginning of the Great Depression in light of this theory.

From the perspective of AES, why does the “pump and dump” price manipulation scheme on exchanges not need to be regulated?

анонимный вопрос

I have already analyzed this topic in quite some detail, so it wasn’t even clear what else to add, but then I wrote a post about behavioral economics.

The “pump and dump” scheme exploits the bounded rationality of economic agents and, of course, information asymmetry—in short, those very “magic bullets” that government regulators love to cling to when they need a justification for regulations.

As long as such a scheme is practiced by private individuals on exchanges not affiliated with them, this is, firstly, behavior that is difficult to distinguish from honest trading, and, secondly, it does not guarantee profit, but carries risks just like any other trading strategy.

If an exchange is caught in such activities, it leads to a loss of volume—serious players prefer more serious platforms. For example, Bitfinex, a fairly old exchange by cryptocurrency standards, was suspected of manipulating the Bitcoin price by using the Tether stablecoin it issues, which may have had incomplete backing. As a result, the exchange that was once first or second in the world by volume has now slipped toward the end of the top ten, and a couple of new popular coins have appeared in the stablecoin market, which first and foremost underwent a full audit for one-hundred-percent dollar backing. Bitmain tried to manipulate the Bitcoin Cash price and almost went bankrupt because of it. Obviously, many are haunted by the laurels of George Soros, who successfully played against the British pound, but this is a bad topic for a long-term game.

The institution of reputation rules better than any regulators.

Tell us about decentralized exchanges, their advantages and disadvantages

anonymous question

Well, at least someone is no longer asking why libertarians push for bitcoins, and is starting to ask rather specialized questions.

Why are exchanges needed

An exchange trader is the best friend of any cryptocurrency user because, in the hope of buying low and selling high, they provide the cryptocurrency system with the necessary liquidity; and the greater the liquidity, the smaller the difference between the buying and selling price of the currency (spread), the smaller the rate fluctuations (volatility), and, accordingly, the higher the attractiveness of crypto as a means of payment for goods.

A classic exchange (currency, commodity, stock — it doesn’t matter) is structured this way. The exchange acts as an intermediary that maintains a registry of assets in client accounts, provides the ability to place trading orders and close them with opposing orders, and, of course, to deposit assets into the exchange and withdraw them from it. The vast majority of cryptocurrency trading transactions and exchanges of cryptocurrencies for fiat are conducted on such classic centralized exchanges.

Naturally, any crypto-enthusiast starts to cringe at the mere word “centralized.” Moreover, these exchanges generally live up to their reputation: they are regularly hacked, with significant sums of money stolen from wallets, and there are complaints regarding possible market manipulation, fake volumes, and so on.

What is special about decentralized exchanges

Therefore, for several years, there has been a trend in the cryptocurrency community toward creating decentralized exchanges. At the very least, it is relatively easy to make an exchange hybrid: orders are processed on a central server, while private keys to the wallets remain in the hands of the users, and accordingly, all transactions are recorded on the blockchain. This is the principle on which, for example, Waves, the largest hybrid exchange in Russia, operates. But a question immediately arises: in which blockchain, specifically, should the transaction be recorded if I am buying, for example, ether with bitcoins?

What qualities must a blockchain possess to ensure the operation of a decentralized exchange? First, the blockchain must allow any tokens to be issued on its base. This is possible for the aforementioned Waves, Ethereum, and many others. Second, the blockchain must be as fast as possible. If blocks are written once every ten minutes, as with bitcoin, it’s not serious at all. The performance leaders today are blockchains based on the Graphene engine — from 3,000 operations per second, with new blocks written to the blockchain every three seconds. With such lags, one can already trade normally. Moreover, with such an engine, even exchange orders can be written to the blockchain, which means the possibility of creating not hybrid, but fully decentralized exchanges.

The oldest and most venerable Graphene blockchain is bitshares, but there are newer competitors, the full list of which is pointless to provide. I will only note the deex project, which is interesting for three things. First, based on the Graphene blockchain, not only a decentralized exchange is implemented, but also a decentralized messenger and a number of other tools. Second, its own network of ATMs is being launched, and bank cards are on the way. This, of course, no longer has anything to do with decentralization, but it has a huge impact on the convenience of the technology’s penetration into the masses. And third, one of the LPR members participates in the work on the project, and this is, of course, a strong reason to distinguish deex from the others.

And finally, about the downsides of decentralized exchanges

If you want to trade there using fiat, it won’t work directly. First, tokens corresponding to that fiat are purchased through a separate gateway, and then trading is conducted with them. As for how to exchange these tokens back into fiat — ask something easier. Perhaps the notorious deex will allow this in its ATMs, but in general, the problem is not solved. Therefore, the main niche for decentralized exchanges is the exchange of different types of crypto for one another.

As a result, volumes on decentralized exchanges are significantly lower, which means relatively low liquidity and a high spread.

And finally, high blockchain performance does not come for free. Instead of honest POW, as with bitcoin or ether, decentralized exchanges lean toward POS, as with Waves, or even DPOS, as with Graphene blockchains. Each new step that speeds up operation reduces the overall level of system decentralization, as it decreases the number of nodes verifying transactions.

So love the exchange traders; they take high risks — all so that we, simple users, don’t have to worry our heads with all these aforementioned high matters.

Especially since bitcoins for LPR-tyans can be transferred even from a regular bank card, without resorting to such complex tools as decentralized exchanges. Here, give it a try: 1A7Wu2enQNRETLXDNpQEufcbJybtM1VHZ8