Retail
Institutional
Pro-Traders
Exchanges
Wholesellers
Dark pools
Broker Internalizations
Exchanges
Wholesellers
Dark pools
Broker Internalizations
(
(
Retail
Institutional
Pro-Traders
Rule: must send to exchange with best price
Exchange
Wholeseller
market order
limit order
In Europe: no best price obligation
Exchange
Dark pools
Type 2: "borrow" broker-dealer system
Type 1: licenced broker-dealer
risk control
You commonly don't access the market directly.
Brokers take many decisions but they are bound by regulations.
Critical: markets are formally linked by best-price rules.
A glimpse of overall infrastructure
Sue wants to sell ABX
Bob wants to buy ABX
sell order
buy order
Clearing House
Stock Exchange
Broker
Broker
3rd party tech
custodian
custodian
record beneficial ownership
central bank for payment
Retail, Institutions, and Pro-Traders are indistiguishable
not clear whether and which institutions are active
Exchanges
Dark pools
Smart On-chain contracts
Exchanges
Smart Contract
Order Driven
Market Maker
Exchanges
Smart On-chain contracts
Settle on the blockchain for digital "assets"
Wire transfer for fiat
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy low
sell high
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy BTC
sell BTC
move BTC to Kraken
Wire: free*; 1-5 days
Credit card: 3.5%
trading fee: 10-25 bps
flat fee in BTC \(\approx\) $4-8
\(\approx\) 10-60 minutes
trading fee: 0-26 bps
35 USD + 0.125%
($5 if >$50,000)
1-3 business days;
possible other fees/delays
Some exchanges allow short selling
Regulated Exchanges
Derivatives trade mostly offshore! Unregulated(?!)
August 2016
https://www.forbes.com/sites/jasonbrett/2019/12/19/congress-considers-federal-crypto-regulators-in-new-cryptocurrency-act-of-2020/#7ddcdfd65fcd
Idea:
Price mechanism:
Prices
invariant \(k=4\times4=16\)
Instantaneous exchange rate:
1 = 1
Contract deposit:
sell 4 DAI for USDC
what price will therefore be quoted?
how many USDC?
Problem: large "slippage" (or price impact)
establish and sell a new token
front-running
transactions enter mem-pool
\(\to\) all visible there
arbitrageur make instant-swap trade at higher gas price
\(\to\) trade instead of original trade
\(\to\) reverse to gain slippage from earlier trader
1
2
4
3
5
6
1
2
5
3
6
7
4
front-running is annoying for the front-run - but will it happen?
From Vitalik Buterin's post on the topic:
https://ethresear.ch/t/improving-front-running-resistance-of-x-y-k-market-makers/1281
\(\Rightarrow\) profitable!
take three pairs (ignore that BTC is not directly on Ethereum)
BTC-DAI
ETH-BTC
ETH-DAI
\(\to\) simply connect with MetaMask (or similar wallet)
Exchange
Internalizer
Wholeseller
Darkpool
Investor
Venue
Broker
Settlement
Investor
Venue
Settlement
On chain
most tokens stay at exchanges and don't get settled on the blockchain
some usage tokens are "in use"
Source: Interactive Brokers
$1,000,000 market order
Katya Malinova and Andreas Park
1. Multiple trading protocols are possible
User-facing exchange mask
Fully Decentralized, "OTC",
Peer-to-Peer Exchange
2. High Level of Transparency
See transactions between "addresses" (="IDs")
3. You can tell who owns what
Key: wallets/addresses = IDs but NOT = traders
Who benefits and loses under which regime?
Each period one is hit with size Q=1 liquidity shock.
Other can absorb the shock at zero cost.
Disclaimer:
Idea:
Requires a system design choice:
Repeated setting:
Front-running is punished by “grim trigger” & trade forever with small and intermediary.
Single shot:
LP always extracts all surplus (or would front-run).
Closest and native to "public" blockchains:
small traders
large trader
small traders
large trader
small traders
large trader
filled
unfilled
Opaque Single ID
Opaque Multi-ID: LP accepts
Opaque Multi-ID: LP rejects
accept offer
"target" small investors only
"target" IDs of both: large and small
front run
Result 1: There exists an equilibrium with no front-running where
provided
Result 2 (numerical): For small discount (=infrequent interaction) factors, the equilibrium with no front-running where LP accept does not exist. Then:
=> "over-trading" with intermediary
Observations
Finding 3:
For the average equilibrium stage payoffs of large traders.
Finding 4: (Numerical)
There exist parametric configurations such that large traders trade with each other at p > 0 in the multi-ID ownership setting, but their average equilibrium payoff in the opaque single-ID setting is higher.
Historically: “Tether Platform currencies are 100% backed by actual fiat currency
assets in our reserve account.”
Today: "The Tether Platform is fully reserved when the sum of all tethers in circulation is less than or equal to the value of our reserves."
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Figure 1. Aggregate Flow of Tether between Major Addresses
Figure 3. Aggregate Flow of Bitcoin between Major Addresses.
Top Accounts Associated with the Flow of Tether from and Bitcoin to Bitfinex
the 1% of hours with the strongest lagged Tether flow are associated with 58.8% of the Bitcoin buy-and-hold return over the period.
the "normal-times" returns
What is pump and dump?
arranged via Telegram Channels