tag:blogger.com,1999:blog-6704573462403312459.post3063302129623216766..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: What equity markets can learn from bitcoin and rippleJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6704573462403312459.post-11934807041363576642013-05-03T10:30:12.763-04:002013-05-03T10:30:12.763-04:00I think its purposeful... tiered access has always...I think its purposeful... tiered access has always been a way for exchange owners to make more money. In the old days, you had to buy a seat in order to get close to the action. You'd earn rents by front running whales phoning in huge orders from the outside. Now you pay to colocate in order to frontrun the whales. Delays would prevent this. But exchanges would lose a major revenue stream.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-10958607131716522742013-05-03T09:07:30.995-04:002013-05-03T09:07:30.995-04:00I've wondered whether the whole latency wars t...I've wondered whether the whole latency wars thing was actually a purposeful market inefficiency. In principle simply putting a randomized time delay on all of the orders (eg it gets delayed by between 10 and 200 seconds) would "solve" the latency wars. That would cause an even playing field and increased market efficiency and so wipe out the profits of elite traders not to mention avoid the billions squandered each year on ultra low latency trading systems.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-71956602635339948372013-05-03T08:47:28.640-04:002013-05-03T08:47:28.640-04:00Interesting. Have you had a look at how Ripple imp...Interesting. Have you had a look at how Ripple implements their distributed order book?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-80624343288465562332013-05-02T11:36:49.840-04:002013-05-02T11:36:49.840-04:00Came over from MR discussion.
I've used excha...Came over from MR discussion.<br /><br />I've used exchange-like systems as class projects, so I've spent a little time thinking about the concurrency and distributed-ness issues. Two particular problems come to mind:<br /><br />1) Time ordering. As Clark alluded to, time ordering is troublesome in a distributed system. A consensus based system can agree on an ordering - which may or may not have any relation to any real world time sequence - but that happens at each ledger close, which just isn't going to be fast enough for quotes. Because of this, a distributed transaction system doesn't work well for queues (like a time priority order book), it does much better when the ordering of transactions is not very critical (payments are like this, since usually the end result is not affected by ordering). I saw a suggestion recently to tame HFT by using auctions every 5 seconds or so. A distributed ledger could probably handle that well.<br /><br />2) Partitioning (aka split brain syndrome). Large distributed networks occasionally split. In such situations, one must choose to either shut down one side of the split or to run inconsistently - ie two separate ledgers. In a centralized system this is easy - the ledger side of the split continues and the other side loses access. In a peer-to-peer system you need an agreed mechanism for choosing a winner. In Ripple and payment like systems the two sides can both continue and figure out a merging later, but that won't work for an exchange.<br /><br />Technically these can be resolved, but they would change the rules of the exchange.<br /><br />-SqueekyWheelAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-20752811334172525212013-04-30T15:13:59.408-04:002013-04-30T15:13:59.408-04:00Google Fiber to the rescue!Google Fiber to the rescue!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62061294811910533052013-04-29T11:14:31.951-04:002013-04-29T11:14:31.951-04:00Clark, good comment.
I have no doubt that distrib...Clark, good comment.<br /><br />I have no doubt that distributed order books introduce a whole new set of complications. <br /><br />Centralized systems have a few centuries' head start. It'll be interesting to see how quickly those who are designing them are able to address some of the problems you highlight, if at all.<br /><br />I don't have the ability to engage you on the architectural level -- I have no idea how tie-breaking works -- but if you're interested in distributed order books there are a number of projects grappling with these problems including Ripple, <a href="https://github.com/FellowTraveler/Open-Transactions" rel="nofollow">Open Transactions</a>, and <a href="http://www.reddit.com/r/buttercoin" rel="nofollow">Buttercoin</a>.<br /><br />As someone who uses markets, I'd hesitate to use a distributed order book if there was any uncertainty over the rate at which trades and quotes are verified. Bitcoin takes 10 minutes, Ripple a few seconds. When they can cut this down to microseconds, even during wild markets in which billions of quoates are being submitted, then I'd consider trading on it.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63401941936339867622013-04-28T23:06:54.137-04:002013-04-28T23:06:54.137-04:00While decentralized ledgers are definitely interes...While decentralized ledgers are definitely interesting, I don't think they're quite up to the challenge of replacing exchanges. At least, not yet. There's quite a few technical problems that need to be worked out. While you're right that the latency wars are not ideal, I don't think there is any way to make them go away without resorting to a less efficient -- and ultimately more problematic -- form of tie-breaking. A distributed ledger would not necessarily make things much better, and if not well thought out, is likely to make them much worse.<br /><br />Just think about some basic questions: How is the latest order book propagated to all participants? Who decides which orders actually get executed? And how often is this information updated?<br /><br />In a centralized system the answers are easy, since there is a single node in charge of everything. This node maintain the the order book, broadcasts its state, and decides which orders are executed. But how does it decide, and is it fair?<br /><br />Well, while many exchanges do have complex rules, such as giving parity to designated market makers, their matching algorithms are almost always based on either time-price priority or pro-rata allocation. These systems reward low latency and large order size, and seem to be the fairest methods of allocation. They are straightforward and incentivize rational trader behavior: place your orders quickly and honestly.<br /><br />So how would everything work with a distributed ledger? In bitcoin, the miner who completes the proof of work picks the contents of the block. They pick which transactions to include based on their size, fee paid, and timing. Notice, this reduces to time-price priority and pro-rata allocation, so it doesn't help much. But let's they also use some other tie-breaker -- could this possibly be any fairer?<br /><br />Even if they use a randomized process, think about what this does to incentives. Traders will just flood the network with transaction requests, since they know only a limited percentage of them will go through. Enterprising nodes will selectively broadcasts trades. Miners will only accept transactions with certain transaction fees, or they will hide themselves behind nodes that will block undesirable transactions from ever reaching them. I can't think of a constraint off the top of my head that can't be abused by constructing malicious network topologies.<br /><br />Ripple attempts to get around this by re-introducing trust, deciding on the state of the ledger via consensus. Ripple also discourages orders from flooding the network by introducing variable transaction fees. This might work, but it still complicates the incentive structure, which could have unintended consequences. However, the consensus process involves quite a bit of network chatter, which slows down price discovery since ledgers can take a few seconds to close.<br /><br />If the MtGox lag can serve as an example, this it not good for stability. Consider how the further discretization of trades affects market dynamics. Does it do anything to mitigate the latency wars? It might actually make them worse, since it encourages traders to broadcast their orders from multiple points in the network, in order to break ties with the highest probability.<br /><br />With a dynamic network topology, geography becomes even more relevant! No longer does it suffice to have a server right next to the exchange. You have to be prepared for network changes, and adapt to them as they happen. You can no longer assume that your latency is relatively constant, or that your competitors' fiber cables are all the same length!<br /><br />There are a few other issues to consider, but this comment is long enough already. :)Anonymoushttps://www.blogger.com/profile/09594446534711959301noreply@blogger.com