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This article mentions "on-the-run clearing" and links to another discussing SBF's plan to clear every thirty seconds, but I don't really understand the proposal

This article mentions "on-the-run clearing" and links to another discussing SBF's plan to clear every thirty seconds, but I don't really understand the proposal discussed. I gather that, on traditional stock exchanges, a lot of trading happens during the day, and then after trading finishes all the people who made trades have to deliver on what they promised. Clearly this is not how retail crypto exchanges work: for those, one has to deliver into one's account with the exchange before one can trade, and, at least from the user's perspective, trades clear immediately, and the user can the request the traded assets be delivered from the exchange back to their accounts elsewhere. What was SBF's proposal, then? Bringing the existing retail crypto model to … non-retail crypto trading? That doesn't seem very risky; if anything, it seems to considerably reduce the risk that a counterparty fail to deliver, because the exchange already has the asset. Obviously there's the risk (as we have seen play out numerous times now) of the exchange itself failing to deliver, but I don't get the sense that that or anything like it is what Terry Duffy or Jeffrey Carter were concerned about. ELI5 what's the big deal about "on-the-run clearing"?

itsoktocry 4y ago
>because the exchange already has the asset. Has the FTX fiasco not yet revealed to you that the exchange doesn't always have the asset?
csours 4y ago
As I understand it on-the-run clearing is about demanding collateral for leveraged trade. Matt Levine has written about it better than I ever could.
- misja111 4y ago
  Traditional clearing does that as well, this is the so called 'margin call'. What's different in on-the-run clearing is that the check happens every 30 seconds, while traditional clearing typically happens between trading days.
misja111 4y ago
> ELI5 what's the big deal about "on-the-run clearing"? I only found an article about it from the author himself: https://jeffreycarter.substack.com/p/on-the-run-clearing https://jeffreycarter.substack.com/p/on-the-run-clearing I read it but I still don't understand what's so wrong with it.
- joosters 4y ago
  I can't find Matt Levine's article about it (he explains it very well). The problem is that often you don't want positions to be quickly liquidated when a margin call comes. The current system of allowing traders time to post more collateral has risks (i.e. they might not pay), but the downside of automated liquidation is: 1) cascading liquidations as forced selling pushes prices down and triggers yet more forced selling 2) not every person is going to be able to monitor their positions 24/7, so they will get wiped out as they sleep (e.g. a farmer hedging their crop wakes up to find they lost all their money because the market temporarily dipped in price overnight)
  - pointsnfigures1 4y ago
    Clearing is very complex to answer inline in this comment. It is not only collecting margin, settlement, and paying/collecting from accounts. It's also risk management. For example, CME and ICE have created proprietary algorithms that calculate the level of risk in a market based on open positions, daily liquidity, width of bid/ask spreads, and daily market movement of the future and underlying cash prices. SBF was basically talking out of his ass when he wanted every 30 seconds. In a volatile market, that would break the market. Price discovery would cease. Bid/Ask spreads would be super wide. Currently, there is a role for brokers to play by qualifying customers. I will tell you 99% of the VCs I interacted with and almost 100% of the entrepreneurs didn't truly understand clearing. Check out Bitnomial.com if you want to see how it is done in a crypto market the way it should be done. They went through at least a three year process at the CFTC to become a designated contract market in the US where lots of crypto exchanges have gone to Bermuda simply to avoid regulation.

itsoktocry 4y ago

>because the exchange already has the asset. Has the FTX fiasco not yet revealed to you that the exchange doesn't always have the asset?

csours 4y ago

As I understand it on-the-run clearing is about demanding collateral for leveraged trade. Matt Levine has written about it better than I ever could.

misja111 4y ago
Traditional clearing does that as well, this is the so called 'margin call'. What's different in on-the-run clearing is that the check happens every 30 seconds, while traditional clearing typically happens between trading days.

misja111 4y ago

> ELI5 what's the big deal about "on-the-run clearing"? I only found an article about it from the author himself: https://jeffreycarter.substack.com/p/on-the-run-clearing https://jeffreycarter.substack.com/p/on-the-run-clearing I read it but I still don't understand what's so wrong with it.

joosters 4y ago
I can't find Matt Levine's article about it (he explains it very well). The problem is that often you don't want positions to be quickly liquidated when a margin call comes. The current system of allowing traders time to post more collateral has risks (i.e. they might not pay), but the downside of automated liquidation is: 1) cascading liquidations as forced selling pushes prices down and triggers yet more forced selling 2) not every person is going to be able to monitor their positions 24/7, so they will get wiped out as they sleep (e.g. a farmer hedging their crop wakes up to find they lost all their money because the market temporarily dipped in price overnight)
- pointsnfigures1 4y ago
  Clearing is very complex to answer inline in this comment. It is not only collecting margin, settlement, and paying/collecting from accounts. It's also risk management. For example, CME and ICE have created proprietary algorithms that calculate the level of risk in a market based on open positions, daily liquidity, width of bid/ask spreads, and daily market movement of the future and underlying cash prices. SBF was basically talking out of his ass when he wanted every 30 seconds. In a volatile market, that would break the market. Price discovery would cease. Bid/Ask spreads would be super wide. Currently, there is a role for brokers to play by qualifying customers. I will tell you 99% of the VCs I interacted with and almost 100% of the entrepreneurs didn't truly understand clearing. Check out Bitnomial.com if you want to see how it is done in a crypto market the way it should be done. They went through at least a three year process at the CFTC to become a designated contract market in the US where lots of crypto exchanges have gone to Bermuda simply to avoid regulation.