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Sorry for the long delay to reply, these are good points that are worth addressing. Yes, you're right, counterparty risk is not completely gone, and it never i

by SilasX 4y ago

Sorry for the long delay to reply, these are good points that are worth addressing. Yes, you're right, counterparty risk is not completely gone, and it never is. Even for a stock share in Schwab cash account, for all I know, it's some massive, elaborate fraud where the share never existed and I've never compensated for it not being there. Yet most of us would roll our eyes at someone insisting that you "can't profit from future [unexpected] successes at Google" -- even by owning shares -- because "lol counterparty risk". I thought I was careful about hedging my remarks to allow for cases like this, and it feels like special pleading to scream bloody murder about that (very tiny) risk, when a) it applies to everything, even that Google share above, and b) that clearly wasn't the kind of counterparty risk that JumpCrisscross (JCC) was warning about to support his thesis that you can't short crypto. Rather, he was claiming that the loss in value of crypto would cascade to your counterparty being unable to honor their side of the short position -- a position, mind you, that is fully backed by cash no longer in their control, and regarded as customer assets by the exchange. He's clearly working from a model in which any such counterparty is using margin, and where the resolution of the contract depends on later sales, with certain price minima, despite my painstaking re-clarification(s) that the short position's model and the exchange do not work like that. Note in particular his comment "If you place 1 BTC short with LedgerX,", which was never part of my model, and not something LedgerX supports to begin with! There are many things you can say about that kind of reply, but not "this is a meaningful attempt to engage with SilasX's point", so of course, I'm going to call that out. (From all I've read, the status of one's deposits at LedgerX is the same as the stock at Schwab -- even if the stock market crashes and Schwab unable to pay its bonds, that Google share is still yours. If you have actual information on that topic, that would be useful to know -- I have a hard time parsing the regulatory filings myself -- but JCC certainly didn't, beyond re-parroting assertions about how LedgerX would definitely crash and use your money to pay off creditors.) Bottom line -- JCC had many opportunities too root-cause the basis of the disagreement and narrow it down to substantive, resolvable claims about the world, but at every point elected to simply assert increasingly irrelevant points with greater confidence. I've never seen that lead to a meaningful dialogue. And so I wasn't surprised when, the following day, he played the same unproductive game.[1] As for your point about bankruptcy: I have to remain skeptical that the hyper-savvy risk manager is worried about the Google long blowing up because of the risk that some general market crash would tear down Schwab, reveal that they weren't really holding shares, and then put your claimed Google shares junior to Schwab's creditors -- especially when we have a very recent example of a bankruptcy court electing not to do that (for FTX). If you disagree, I'm happy to hear why. [1] https://news.ycombinator.com/item?id=35558582 https://news.ycombinator.com/item?id=35558582

kasey_junk 4y ago
Savvy risk managers don’t tend to use retail brokerages not because of the risk but because other venues suit their operating model better. That said if they were using Schwab for a long equity position they would not be worried about their shares being used for other creditors payback because the law says it can’t. Share holders have more senior claims than other creditors. Further, even if Schwab was insolvent there is a long chain of custody on equity shares managed by a too big to fail entity (cede) to fall back on. Other kinds of tradable assets don’t have such protections (such as fx futures or even fractional shares) so when trading these risk managers actively do look at the balance sheet of the clearing partners. In many cases that is a too big to fail entity like the CME but clearing default was a hot topic the last time I worked in the space. I don’t know the specifics of LedgerX held crypto but given it’s a cftc regulated exchange and a bankruptcy judge actually having to rule on this, my guess is those tokens do not have the same protections as a google share at Schwab. None of this of course matters for a single btc, that’s not enough to get professional risk management involved and if the crypto space went away tomorrow you’d just move along on losing that. But! For someone wanting to put on a large short (think a Soros style bet) figuring out how to manage the counterparty risk is a big part of the trade and it would be very common to not put that trade on with an exchange or otc desk headquartered in the country whose currency you are shorting. Precisely because you’d be worried that the basis for your short thesis would cause contagion that collapsed your counterpart. I can see how that thinking could be extended to an exchange whose business was focused on crypto. Again, I don’t know the crypto space well enough to take have a meaningful opinion.

by SilasX 4y ago

kasey_junk 4y ago

Savvy risk managers don’t tend to use retail brokerages not because of the risk but because other venues suit their operating model better. That said if they were using Schwab for a long equity position they would not be worried about their shares being used for other creditors payback because the law says it can’t. Share holders have more senior claims than other creditors. Further, even if Schwab was insolvent there is a long chain of custody on equity shares managed by a too big to fail entity (cede) to fall back on. Other kinds of tradable assets don’t have such protections (such as fx futures or even fractional shares) so when trading these risk managers actively do look at the balance sheet of the clearing partners. In many cases that is a too big to fail entity like the CME but clearing default was a hot topic the last time I worked in the space. I don’t know the specifics of LedgerX held crypto but given it’s a cftc regulated exchange and a bankruptcy judge actually having to rule on this, my guess is those tokens do not have the same protections as a google share at Schwab. None of this of course matters for a single btc, that’s not enough to get professional risk management involved and if the crypto space went away tomorrow you’d just move along on losing that. But! For someone wanting to put on a large short (think a Soros style bet) figuring out how to manage the counterparty risk is a big part of the trade and it would be very common to not put that trade on with an exchange or otc desk headquartered in the country whose currency you are shorting. Precisely because you’d be worried that the basis for your short thesis would cause contagion that collapsed your counterpart. I can see how that thinking could be extended to an exchange whose business was focused on crypto. Again, I don’t know the crypto space well enough to take have a meaningful opinion.