4 ms·

It's where Goldman would net off trades between their own clients, effectively acting as an exchange for their clients using the prices on the official exchange

It's where Goldman would net off trades between their own clients, effectively acting as an exchange for their clients using the prices on the official exchange. They say in the article they won't act as market-makers or hold their own positions. That means they won't perform their usual capacity for clients, where they act as middleman between the exchange and their own clients. ie they won't make a price for their clients to buy a bitcoin future the client wants to sell, and then turn around and sell the bitcoin to someone else the exchange later in the day. They won't do that. What the will do is buy the bitcoin future if they have another client that wants to buy it at the same time, because then they will never assume much risk.

dailyvijeos 9y ago
It’s smart because holding BTC in a Tulip-bulb crisis is insanely risky. This current crisis is due to elastic demand based on short-lived, fashionable attention of a tiny currency, whereas common currencies are more inelastic because their usage and scale lends themselves to more stability. The value will collapse when people lose interest or when large institutions get over the mania of New Relationship Energy. Durable, appreciating assets that are easily liquidated are ideal for holding balance sheet value. For transactions, BTC maybe fine but even that is risky. It will be interesting to see if shorting will be possible.
- sdljfslkjfdsj 9y ago
  I can't see shorting it outright without being wheeled out on a stretcher. Options will be the best play to safely express a bearish position with asymmetric risk/reward assuming they aren't priced to insanely due to IV. Still at least you know your risk.
  - deleted 9y ago
    [deleted]
  - lallysingh 9y ago
    Just use a stop order:https://support.gdax.com/customer/portal/articles/2426596 https://support.gdax.com/customer/portal/articles/2426596 There will be some slippage, but it'll be relatively bound.
    - CoryG89 9y ago
      I assume this is getting downvoted because it won't actually work. Can someone explain why? Can you not use a stop loss like this in futures trading when you short something? May be a silly question, but I know little about this stuff.
      - travmatt 9y ago
        I’m no investor, but one reason I could think as to why it wouldn’t work is once a crash starts, demand would suddenly dry up at the prices you specified and you’d suddenly find yourself with a bunch of orders that can’t be filled.
        nostrademons 9y ago
        Yeah. Or worse, you have orders that are filled, but because they are market orders and the market has disappeared, they aren't filled at anywhere close to the price you expected. At my first job I had a project that involved looking at the actual order book for various stocks on the NASDAQ. There's always some asshole who puts in a limit buy for $0.01 on the hopes that if liquidity dries up, they'll be the best bid and get the stock for literal pennies on the dollar (I've been that asshole, though I've never actually had an order filled at that price). Normally all these orders are completely irrelevant because they're nowhere close to being the best bid, so other buyers get the stock and they just sit there on the order book. In a flash crash scenario where everybody runs to the exits at once, it's possible for liquidity to completely dry up. The market gets hammered by so many sell orders that they burn through all the people willing to buy at reasonable prices. Then the exchanges dutifully match you up with whoever's left in the order book...which is usually the jokers who are like "Well, I'll put in a limit order for $0.01, leave it there, and see if it ever fills." Because your stop is actually a market order, you take whatever price the market gives you, which is...$0.01. You've just sold your $18K bitcoin for one cent. This actually happened with the flash crash of 2010, but because market manipulation was proven, NASDAQ halted trading and invalidated the trades that occurred at those prices. There are no such failsafes or means of recovery with Bitcoin. https://en.wikipedia.org/wiki/2010_Flash_Crash https://en.wikipedia.org/wiki/2010_Flash_Crash Stop limits have the problem you mentioned - they just won't get filled in a flash crash, leaving you with Bitcoin that you can't get rid of.
logicallee 9y ago
So if the blockchain evolved such that it took 2 or 3 hours for a transaction to clear, and cost, say, $5,000 then during the same 2-hour block Goldman could let A sell 50,000,000 pretend bitcoins to B, B could sell 25,000,000 pretend bitcoins to C, and 25,000,000 pretend bitcoins to D, then the price could move up (or down) and A could buy back 25,000,000 from C and 25,000,000 from D, so that A, B, C, and D have the same number of virtual bitcoins that they started with - but the exchange could have resulted in a transfer of net actual dollars between A, B, C, and D - without incurring up to 50 million * $5,000 = $250 billion in transaction fees? Where even though this net transfer happened, all of A, B, C, and D think that it was fair and what they wanted? (I call them "pretend bitcoins" because they don't need to be reflected in the blockchain - the transaction of 25 million pretend bitcoins in motion aren't reflected in the blockchain.) feel free to correct me if I'm very wrong.
- rmah 9y ago
  Neither CME or CBOE bitcoin futures are directly connected to bitcoins. Both will be cash settled (i.e. no bitcoin delivery). There will be no need for buyers, sellers or intermediaries dealing in bitcoin futures to buy/sell/own bitcoin.
deleted 9y ago
[deleted]
vostok 9y ago
> It's where Goldman would net off trades between their own clients This is internalization, which is different from clearing.
- riazrizvi 9y ago
  Hmm, in trading, internalization is where a broker would fill a buy order from its own inventory instead of acting as the middle man it normally is. So not sure why that idea has been brought up. To clarify, Goldmans are offering to buy* futures their clients want to sell, if they can line up one of their other clients/counterparties to buy it from Goldmans at the same time. Goldmans is acting only as an intermediary or a broker. The key idea for clients is that if you want to sell, you want to get a quick and good bid from your trading partner. Goldmans are not offering to do that. They won’t make a price straight away for their client, they will only broker trades, so they will need to call up others to find out what their price is, hold them on the line and then offer the price to the client. At the end of the trading day, all Goldmans will do is net off trades between their own counterparties. Goldman clients expect the company usually to act as market maker for futures trades. As a former sell-side trader, what that means is I can make my own prices for the client, buy their futures off them, hold them, and later in the day I can sell them myself, possibly to the exchange. I hold my own position, I assume my own risk, on a short term/daily basis. This is better for the client because they can get an immediate market, they don’t have to wait for me to call someone else. In a way Goldmans are saying they won’t trade against their own clients. Given their history with the CDOs (think The Big Short), and given how opaque the underlying Bitcoin market is, this seems to me to be a covert reassurance that they won’t be working against their clients. * or sell obviously.
  - vostok 9y ago
    The important thing about internalization in this context isn't who takes the other side, but the fact that the trade gets done before it even reaches an exchange. You're right that it usually refers to a market maker taking the other side as principal off exchange. > To clarify, Goldmans are offering to buy* futures their clients want to sell, if they can line up one of their other clients/counterparties to buy it from Goldmans at the same time. This is not what clearing means. You're talking about execution. They'll still clear the trades even if you execute away. There's not really anything else I can add to this discussion. An imperfect analogy is that you're buying the futures with a credit card and Goldman will step in and pay the bill if you can't.

dailyvijeos 9y ago

It’s smart because holding BTC in a Tulip-bulb crisis is insanely risky. This current crisis is due to elastic demand based on short-lived, fashionable attention of a tiny currency, whereas common currencies are more inelastic because their usage and scale lends themselves to more stability. The value will collapse when people lose interest or when large institutions get over the mania of New Relationship Energy. Durable, appreciating assets that are easily liquidated are ideal for holding balance sheet value. For transactions, BTC maybe fine but even that is risky. It will be interesting to see if shorting will be possible.

sdljfslkjfdsj 9y ago
I can't see shorting it outright without being wheeled out on a stretcher. Options will be the best play to safely express a bearish position with asymmetric risk/reward assuming they aren't priced to insanely due to IV. Still at least you know your risk.
- deleted 9y ago
  [deleted]
- lallysingh 9y ago
  Just use a stop order:https://support.gdax.com/customer/portal/articles/2426596 https://support.gdax.com/customer/portal/articles/2426596 There will be some slippage, but it'll be relatively bound.
  - CoryG89 9y ago
    I assume this is getting downvoted because it won't actually work. Can someone explain why? Can you not use a stop loss like this in futures trading when you short something? May be a silly question, but I know little about this stuff.
    - travmatt 9y ago
      I’m no investor, but one reason I could think as to why it wouldn’t work is once a crash starts, demand would suddenly dry up at the prices you specified and you’d suddenly find yourself with a bunch of orders that can’t be filled.
      - nostrademons 9y ago
        Yeah. Or worse, you have orders that are filled, but because they are market orders and the market has disappeared, they aren't filled at anywhere close to the price you expected. At my first job I had a project that involved looking at the actual order book for various stocks on the NASDAQ. There's always some asshole who puts in a limit buy for $0.01 on the hopes that if liquidity dries up, they'll be the best bid and get the stock for literal pennies on the dollar (I've been that asshole, though I've never actually had an order filled at that price). Normally all these orders are completely irrelevant because they're nowhere close to being the best bid, so other buyers get the stock and they just sit there on the order book. In a flash crash scenario where everybody runs to the exits at once, it's possible for liquidity to completely dry up. The market gets hammered by so many sell orders that they burn through all the people willing to buy at reasonable prices. Then the exchanges dutifully match you up with whoever's left in the order book...which is usually the jokers who are like "Well, I'll put in a limit order for $0.01, leave it there, and see if it ever fills." Because your stop is actually a market order, you take whatever price the market gives you, which is...$0.01. You've just sold your $18K bitcoin for one cent. This actually happened with the flash crash of 2010, but because market manipulation was proven, NASDAQ halted trading and invalidated the trades that occurred at those prices. There are no such failsafes or means of recovery with Bitcoin. https://en.wikipedia.org/wiki/2010_Flash_Crash https://en.wikipedia.org/wiki/2010_Flash_Crash Stop limits have the problem you mentioned - they just won't get filled in a flash crash, leaving you with Bitcoin that you can't get rid of.

logicallee 9y ago

So if the blockchain evolved such that it took 2 or 3 hours for a transaction to clear, and cost, say, $5,000 then during the same 2-hour block Goldman could let A sell 50,000,000 pretend bitcoins to B, B could sell 25,000,000 pretend bitcoins to C, and 25,000,000 pretend bitcoins to D, then the price could move up (or down) and A could buy back 25,000,000 from C and 25,000,000 from D, so that A, B, C, and D have the same number of virtual bitcoins that they started with - but the exchange could have resulted in a transfer of net actual dollars between A, B, C, and D - without incurring up to 50 million * $5,000 = $250 billion in transaction fees? Where even though this net transfer happened, all of A, B, C, and D think that it was fair and what they wanted? (I call them "pretend bitcoins" because they don't need to be reflected in the blockchain - the transaction of 25 million pretend bitcoins in motion aren't reflected in the blockchain.) feel free to correct me if I'm very wrong.

rmah 9y ago
Neither CME or CBOE bitcoin futures are directly connected to bitcoins. Both will be cash settled (i.e. no bitcoin delivery). There will be no need for buyers, sellers or intermediaries dealing in bitcoin futures to buy/sell/own bitcoin.

deleted 9y ago

[deleted]

vostok 9y ago

> It's where Goldman would net off trades between their own clients This is internalization, which is different from clearing.

riazrizvi 9y ago
Hmm, in trading, internalization is where a broker would fill a buy order from its own inventory instead of acting as the middle man it normally is. So not sure why that idea has been brought up. To clarify, Goldmans are offering to buy* futures their clients want to sell, if they can line up one of their other clients/counterparties to buy it from Goldmans at the same time. Goldmans is acting only as an intermediary or a broker. The key idea for clients is that if you want to sell, you want to get a quick and good bid from your trading partner. Goldmans are not offering to do that. They won’t make a price straight away for their client, they will only broker trades, so they will need to call up others to find out what their price is, hold them on the line and then offer the price to the client. At the end of the trading day, all Goldmans will do is net off trades between their own counterparties. Goldman clients expect the company usually to act as market maker for futures trades. As a former sell-side trader, what that means is I can make my own prices for the client, buy their futures off them, hold them, and later in the day I can sell them myself, possibly to the exchange. I hold my own position, I assume my own risk, on a short term/daily basis. This is better for the client because they can get an immediate market, they don’t have to wait for me to call someone else. In a way Goldmans are saying they won’t trade against their own clients. Given their history with the CDOs (think The Big Short), and given how opaque the underlying Bitcoin market is, this seems to me to be a covert reassurance that they won’t be working against their clients. * or sell obviously.
- vostok 9y ago
  The important thing about internalization in this context isn't who takes the other side, but the fact that the trade gets done before it even reaches an exchange. You're right that it usually refers to a market maker taking the other side as principal off exchange. > To clarify, Goldmans are offering to buy* futures their clients want to sell, if they can line up one of their other clients/counterparties to buy it from Goldmans at the same time. This is not what clearing means. You're talking about execution. They'll still clear the trades even if you execute away. There's not really anything else I can add to this discussion. An imperfect analogy is that you're buying the futures with a credit card and Goldman will step in and pay the bill if you can't.